VAT ON EXCESS ON INSURANCE?

[vamily0804]

Hi All,

My client is contracted by a insurance company to do repairs. Sometimes he deduct the insurance excess from his invoices, he only receive the nett amount. But he charge vat on the amount before he deduct the excess. I just want to make sure because i think he have to charge vat on the amount he gets after the excess because it's like a discount he gave to the insurance company.

[Dave A]

You raise an interesting point! I've had a fight with panel beaters on two occasions so far on the VAT issue.

What I got from the panelbeater was a tax invoice that showed no VAT. When I asked for the VAT amount to be shown, they said the VAT belonged to the insurer. My point is if that's the case, the panel beater shouldn't be giving me an invoice at all, just a receipt for the monies paid, and I'll get my tax invoice from the insurer.

After all, who is charging the excess?

[vamily0804]

It looks to me that we are missing something ?

It just don't feel right

[Dave A]

I think there are two ways of solving the problem.

Basically we've got one job that is being paid for by two parties.
Either

1. both parties are billed separately for their portions, or
2. the panel beater must invoice the one party (insurance company) and the insurance company then invoices the other party (insured client) for their portion.

If we take option one, the panel beater makes out tax invoices to both the insurer and the insured for their respective share. From a practical implementation point of view, it would be simple enough to record on the invoice to the insurer that the insured has been billed, and paid the excess.

In option two, the full tax invoice amount is made to the insurer. When the insured pays the excess, this is captured as a part payment against the invoice, a receipt is issued and the insurer will (no doubt at their leisure) settle the balance. The client must obtain their tax invoice from the insurer for record and VAT input tax claim purposes.

Personally I'd prefer option1, but something that might influence the correct way to do this is the nature of the contract.

Who is the panel beater contracted with for the repair? The insurer, the insured, or both?

[vamily0804]

According to my client he has to charge the insured the excess, sometimes the insured pays him sometimes not, anyway the insurer only pays the amount after the excess is deducted.

[Joe]

Hello all.
I'm owner of a panelbeating shop, and I hope I can clarify this issue somewhat.

The excess is also known as "the first amount payable by the insured".
The supplier - it could be panelbeater or computer shop, whatever the case may be - gets authorization for the full amount of the repair, vat included, and the excess gets deducted from that amount. THUS, VAT is included in the amount.
Most often the excess is calculated as 5% of the claim with a minimum of R2000.00. The 5% is calculated on the full amount, which is tax inclusive.
The supplier collects the excess on behalf of the insurance company, and the insurance company deducts the excess from the suppliers payment.
Therefore, option 2 is the way in which most of us works. The contract is between the supplier and the insurance company (and beleive me, those contracts are the size of a medum size town's telephone directory), and we have a mutual client, the insured.

[Dave A]

Thanks Joe.

So from that I gather that if the insured wants to claim VAT on the first amount payable - ask for your tax invoice from the insurance company. Which realistically they should be sending automatically anyway.

I wonder if insurance companies have been showing excesses as income for VAT purposes

[Dave A]

An update on this issue:

SARS has made a Binding General Ruling (VAT) NO: 14 dated 22nd March 2013, which brings clarity and sanity to the situation.

Section 2.9 reads as follows:

2.9 Excess payments

(a) Insured pays excess directly to third party supplier

The third party supplier,³ in making a taxable supply of goods or services, is liable to issue a valid tax invoice in respect of this supply.

The third party supplier must issue two tax invoices, that is, one to the insured to the extent of the excess payment and one to the insurer to the extent of the trade payment.

The short-term insurer is, in terms of section 16(3)(a), entitled to deduct input tax on the goods or services acquired from the third party supplier and is therefore not entitled to a section 16(3)(c) deduction in respect of this supply.

The insured (being a vendor) is, in terms of section 16(3)(a) and being in possession of the tax invoice, entitled to deduct input tax on the goods or services acquired from the third party supplier to the extent that those goods or services are acquired for the purposes of making taxable supplies.

The short-term insurer issuing a notice to an insured which informs the insured of the potential output tax liability, as envisaged in section 8(8), that arises as a result of a trade payment made in terms of a contract of insurance.

(b) Short-term insurer pays full amount to third party service provider and recovers excess from insured

Excess payments received by short-term insurers from the insured do not constitute “consideration” as defined in section 1(1) and as a result fall outside the scope of the VAT Act. These payments are therefore not subject to VAT in the hands of the short-term insurer.

The short-term insurer is, in terms of section 16(3)(a), entitled to deduct input tax on the goods or services acquired from the third party supplier limited to the trade payment made in terms of the contract of insurance.

Where the short-term insurer, acts as an agent of the insured when contracting with the third party supplier for the portion of the excess payment, the short-term insurer will be required to issue a statement contemplated in section 54(3) to the principal where the third party supplier issued the tax invoice in the name of the short-term insurer.

The insured (being a vendor) is, in terms of section 16(3)(a), entitled to deduct input tax on the goods or services acquired from the third party supplier to the extent that goods or services are acquired for the purposes of making taxable supplies, provided the insured obtains and retains the tax invoice or statement contemplated in section 54(3), whichever is applicable.

³ Third party suppliers are suppliers of goods or services receiving trade payments from short-term insurers which are in respect of goods or services supplied to the short-term insurer as a result of the short-term insurer being liable, in terms of a short-term insurance policy, to replace or repair goods or services of the insured which are lost, damaged or destroyed.

Thus when the insured pays the repairer the excess directly (which is my typical experience of how these things go down), the repairer must issue a tax invoice that includes VAT to the insured. It is not a zero rated supply.

And as VAT is an inclusive tax, if the excess is set at R2000, this includes VAT. The VAT portion is not added onto the excess amount.

If the excess is paid by the insured to the insurer (who in turn settles the supplier in full), the insured must ensure they receive a copy of the tax invoice from the supplier to the insurer, and this will be adequate evidence to enable claiming Input VAT on the excess (where permissible).

The entire ruling is attached below for ease of reference.

[Dave A]

A lovely kink on this "VAT on Excess" issue has just cropped up.

I've been refunded my excess on a particular claim as the insurer managed to recover the cost of repairs from the other party to the accident. Well, almost.

The excess paid (to the repairer) was R2000 (including VAT).
Naturally the VAT portion was claimed as Input VAT.
I have now received a refund in the amount of R1754.38
This seems in accordance with the following section of the binding general ruling attached in the previous post.

2.11 Recoveries
A short-term insurer is not liable to account for output tax on amounts recovered from a third party or the third party’s short-term insurer. These amounts are not payment in respect of a supply to the third party or the third party’s short-term insurer.

I trust I can safely assume the same applies to my refund received, even although I'm not a short term insurer. The question now is how to post the entry.

Post to an "Other income" line item named "Income outside of scope of VAT" perhaps?
Not exactly a regular event...
Any ideas or suggestions welcome.

[Dave A]

And years later, yet another dilemma to ponder. For ease, I've kept the numbers rounded.

A LDV has an accident and is deemed beyond economic repair.

Insurance processes the claim as follows:

Value of vehicle:	R150 000.00
Excess deducted:	R7 500.00
Paid to asset finance:	R90 000.00
Paid to insured:	R52 500.00

The insured is a registered VAT vendor.
The asset finance is structured as a financial lease.

My thought is that the insured has received a taxable supply of R142 500.00 including VAT, and that the payment to the finance company is merely a payment made on behalf of the insured. Anyone care to confirm or correct that thought?