VAT: An ‘Indemnity Payment’ Under a Contract of Insurance is the Same as an Indemnity/Guarantee Under a Contractual Relationship, Not!

• Jurisdiction: South Africa
• Author: Des Kruger Kruger
• DOI: 10.10520/ejc-btclq_v12_n1_a3
• Published date: 01 March 2021
• Date: 01 March 2021
• Pages: 6-12
• Published By: Siber Ink

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.