Making an insurance claim can be a stressful process. You’ve suffered a loss or damage, and now have to navigate the claims process to receive compensation from your insurer. As you work through the process, a question may arise – is VAT payable on the claim amount I receive? This is an important consideration from both a financial and legal perspective. Let’s discuss further.
Is VAT Payable on Insurance Claim Payouts?
The general rule is that VAT is NOT payable on legitimate insurance claim payouts in South Africa.
SARS does not view an insurance claim as payment for a standard good or service. Rather, it is considered compensation for proven losses suffered. The indemnity principle applies, whereby the claim payment aims to place the insured back into the same financial position they were before the loss or damage occurred.
There are some exceptions however, where VAT could be payable on a claims settlement. These include:
Replacement item provided by insurer: If the insurer replaces a damaged item directly instead of paying out a cash settlement, they may charge VAT if they are a registered vendor.
Third party claims: If you claim against a third party’s insurance policy for damage they caused to your property, their insurer may levy VAT if they provide a replacement item or repair services to settle the claim.
Commercial vehicle insurance: Claims under commercial vehicle insurance policies are subject to VAT, as these vehicles are used predominant for taxable business activities.
Building insurance: Settlements that relate to the construction, renovation, repair or maintenance of commercial property may be liable for VAT.
Business interruption claims: Claim payments meant to cover lost income due to property damage or other issues may be considered taxable revenue, and thus subject to VAT.
So in most personal insurance claims by individuals, VAT is not applicable on cash settlements received from the insurer. But there are grey areas depending on the exact circumstances, so engage with your insurer or financial advisor to clarify the VAT implications in your particular situation.
Claiming Input VAT on Insurance Policy Premiums
While VAT is generally not levied on claim payouts, you do pay VAT when taking out an insurance policy, as premiums are subject to 15% VAT. This is known as “input VAT” from the policyholder’s perspective.
If you use the insured property or asset 100% for personal purposes, you cannot reclaim this input VAT paid on insurance premiums. But if the item is used partially or fully for business/taxable activities, you may be able to deduct a portion of the VAT paid on insurance as input VAT and reduce your overall VAT liability.
To claim input VAT, you would need to provide supporting documentation like the insurance invoice and be registered for VAT with SARS. You can only claim input VAT to the extent that the item insured is used for taxable business purposes. For example, if you insure a commercial vehicle that is used 60% for business deliveries (taxable) and 40% for personal use, then theoretically 60% of the VAT on those insurance premiums can be claimed back as input VAT.
Proper record keeping is key to ensuring any input VAT claimed back is justified and can be verified if SARS conducts an audit. Reputable insurers will automatically provide VAT invoices to commercial clients to facilitate this input VAT claim process.
Other Taxes on Insurance Claim Payouts
While standard VAT generally does not apply on insurance claim settlements, other taxes may still need to be paid in certain situations:
If you receive a large settlement for loss of income under a business interruption policy, this amount is considered taxable income and you will need to declare it and pay income tax accordingly.
Capital Gains Tax
If you receive more from the insurer than what you originally paid for the item (or its current market value), the excess may be subject to CGT.
Estate Duty Tax
For very large claims settled to a deceased estate, estate duty tax may apply. Typically, no estate duty is payable if the estate assets total less than R3.5 million.
Outsourcing Specialists Can Assist
As you can see, the VAT implications around insurance claims can be complex, with many “grey areas” to consider. There are often tax optimization opportunities as well, in terms of reclaiming input VAT.
Many individuals and businesses prefer to outsource this specialized area to expert consultants who understand the legal technicalities around VAT on insurance claims. They can review your situation in detail and ensure you pay only the minimum VAT and other taxes legally required – no more.
This optimization service usually costs a small percentage of the total claim settlement value but can generate excellent tax savings that more than justify the fees. They also ensure full compliance with SARS regulations to avoid any penalties or legal issues.
The good news is that in most common personal insurance claim situations, VAT is not payable on the actual settlement amount you receive from the insurer. But there may be other applicable taxes or exceptions depending on the circumstances, so engage with reputable advisors to clarify how VAT and other taxes apply to your particular claim.
Recording keeping is also key to justify any input VAT claimed back from SARS. With the right professional assistance, you can ensure minimal taxes are paid so your claim settlement goes as far as possible to cover the losses or damages suffered. If you are still facing problem in calculating your VAT then use our VAT calculator for mental peace.
Frequently Asked Questions
If my home is burgled and I claim from my household insurance, will I pay VAT on the money I receive?
No, you will not pay any VAT on a home contents insurance claim you receive as an individual for a personal loss. The settlement represents compensation, not payment for taxable goods/services.
My warehouse stock was damaged in a fire. My business has insurance, but will VAT apply to any claims settlement I receive?
Potentially yes, as you are operating the warehouse for taxable business activities. Discuss with your insurer and tax advisor on what VAT implications may apply and if any input VAT can be claimed back on the policy premiums to optimize your taxes payable.
I claimed successfully from a homeowner’s policy for repairs required due to storm damage. The insurer arranged for a contractor to conduct repairs. Do I pay VAT on these services?
Possibly yes, as the repairs contractor is charging for taxable services. But the homeowner’s policy should cover this VAT charged on repairs to ensure you have sufficient funds to pay for the work required.