06/04/2018
VAT increase – Short Term Insurance
Kindly note that these FAQ’s were agreed to by the short-term insurance industry and is still subject to SARS and FSB approval - updated versions to follow.
In the Minister’s Budget speech on 21 February 2018, an increase in the standard rate of VAT from 14% to 15% was announced. The rate increase applies from 1 April 2018. The following questions and answers have been compiled following a high level VAT rate change risk analysis performed across the short-term insurance industry and is intended to illustrate the general principles and set out a common approach to be applied across the industry. Please note that SARS approval of the special transitional VAT ruling is still awaited and this will most likely initially (due to the limited implementation period allowed) be confirmed in the form of a release by SARS of FAQs relating to short-term insurance to be published on the SARS website (www.sars.gov.za).
These FAQ’s will also be circulated to the FSB for the required approval required i.r.o. notifications to policyholders, etc.
Premium - Does the increase in the VAT rate apply to shortterm insurance premiums? Yes, where an insurance premium attracts VAT at the standard rate the VAT component of the VAT inclusive premium increases from 14% to 15% with effect from 1 April 2018. Example: Premium of R114 becomes R115. In particular the insurer will be liable for output tax and an insured VAT vendor will subject to the normal rules be entitled to input tax claimable equal to the tax fraction of 15/115, whether or not the premium was in fact increased by the increased amount of VAT.
Premium - apply to policies where premiums have been paid before 1 April 2018 for annual or fixed term periods of cover commencing before 1 April 2018 - say an annual policy purchased or renewed on 1 January 2018 and paid in
say January? For an annually paid premium i.e. in respect of an annual or fixed term cover period that commenced before the VAT rate change - where the premium was paid before the 1 April 2018 there is no effect on the premium already paid. No adjustment to the premium needs to be made provided there is no variation made to the cover that requires increased or reduced premium (see FAQ13).
Claims - Will insurers pay claims inclusive of VAT at 15% despite the premium only having been paid with VAT
at 14%? Yes. Despite the sum insured on a policy being set at a figure inclusive of VAT at 14% (say R114 000) there is no reason why an insurer should not settle a claim with VAT at 15% (i.e. R115 000). The insurer has a VAT input credit on both settlement scenarios leaving the VAT exclusive cost of claim at R100 000. It is anticipated that there will be a public announcement that insured amounts will notionally increase to include VAT at 15% even though the policy document does not
reflect the amounts.
Sums insured - How does the increase in VAT rate affect sums insured and other policy limits and sub limits that were set before 1 April 2018? In most instances policies are written on a VAT inclusive basis meaning that all sums insured and other monetary limits and sub limits are specified at VAT inclusive levels. In principle wherever a policy limit or sub limit is referred to and forms the basis of settlement in the event of a claim the figure needs to be at least notionally increased (see
final paragraph) to allow for the increase in the VAT rate. This will support the same VAT exclusive claim cost and settlement figure in the hands of the policyholder. This does not affect an insurer’s net of VAT cost of claim in that insurers will have an increased input credit on claims payments and / or indemnity payment. Such increases can be regarded as notional and will persist until the end of the cover period when the policy will terminate or be renewed and at which time fresh sums insured must be agreed inclusive of VAT at 15%.
