Car insurance payout received due to motor vehicle accident: what are the VAT issues?
19 May 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: A VAT vendor
buys a passenger motor vehicle and does not claim the input VAT on the purchase
The vehicle is insured and input VAT is claimed on insurance
The vehicle is written off in an accident and the insurer
pays out on the claim.
Are the proceeds of the insurance claim subject to output
Would the answer be different if input VAT had not been
claimed on the insurance premiums?
A: The deduction
of the input tax in respect of an insurance premium paid is a matter separate
to whether or not the indemnity receipt (payment by the insurer) will have tax
In terms of section 8(8) of the Value-Added Tax Act the
payment by the insurer to the insured is deemed, to the extent that it relates
to a loss incurred in the course of carrying on an enterprise, to be
consideration received for a supply of services performed on the day of receipt
of that payment. That doesn’t depend on
whether or not the input tax was deducted.
(Note we don’t comment on the deduction of the input tax itself).
Section 8(8) then specifically provides that the subsection
must not apply in respect of any indemnity payment received by a vendor under a
contract of insurance to the extent that such payment relates to the total
reinstatement of goods, stolen or damaged beyond economic repair, in respect of
the acquisition of which by the vendor a deduction of input tax under section
16(3) was denied in terms of section 17(2) or would have been denied.
As the input tax in respect of the motor car was denied, no
deemed supply arises when the indemnity payment is received.
Disclaimer: Nothing in this query and answer should be construed as
constituting tax advice or a tax opinion. An expert should be consulted for
advice based on the facts and circumstances of each transaction/case. Even
though great care has been taken to ensure the accuracy of the answer, SAIT do
not accept any responsibility for consequences of decisions taken based on this
query and answer. It remains your own responsibility to consult the relevant
primary resources when taking a decision.