VAT: An ‘Indemnity Payment’ Under a Contract of Insurance is the Same as an Indemnity/Guarantee Under a Contractual Relationship, Not!
Date | 01 March 2021 |
Pages | 6-12 |
Author | Des Kruger Kruger |
DOI | 10.10520/ejc-btclq_v12_n1_a3 |
Published date | 01 March 2021 |
6© Siber ink
VAT: An ‘Indemnity Payment’
Under a Contract of
Insurance is the Same as an
Indemnity/Guarantee Under a
Contractual Relationship, Not!
DES KRUGER*
AbstrAct
A vendor who receives an indemnity payment, or is indemnified by the
payment of an amount of money to another person, under a contract of
insurance, is deemed to have made a supply of services in relation to the
payment ‘to the extent that it (the payment) relates to a loss incurred in the
course of carrying on an enterprise’ (section 8(8) of the Value-Added Tax Act
89 of 1991 (‘VAT Act’).
The term ‘indemnity payment’ is not defined. The ordinary meaning of
‘indemnity’ is ‘compensation for loss incurred’ and ‘compensation given to
make the person whole from a loss sustained’. The article concludes that an
indemnity payment received by a vendor, and in fact a payment made to
a third party to indemnify the vendor, is an amount of compensation paid
to indemnify the vendor for any loss or damages incurred by the vendor.
‘Insurance’ is defined in section 1(1) of the VAT Act as ‘insurance or guarantee
against loss, damage, injury or risk of any kind whatever’.
Many commercial transactions contain indemnities/guarantees/warranties
that may result in a loss being incurred by a party to the transaction and
the counterparty having to make a payment in consequence thereof. While
the compensation paid may constitute an ‘indemnity payment’ in the broad
sense, the crisp issue is: in what circumstances would such an indemnity/
guarantee/warranty payment fall within the ambit of section 8(8) of the VAT
Act such that the recipient vendor of the compensation is required to account
for VAT in respect of such payment?
This article considers the requirements of section 8(8) of the VAT Act
and concludes that it is only where an insurer, who provides insurance in
exchange for the payment of premiums, makes an indemnity payment that
such payment will fall within the ambit of section 8(8). The article concludes
that compensation payments made under commercial agreements would
generally not fall within the ambit of section 8(8) of the VAT Act as such
payments would not meet the requirements of that section. Such compensa-
tion may nevertheless be subject to VAT based on general principles, but that
is a subject for another article.
* Consultant, Webber Wentzel Attorneys.
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