[FAQ] The VAT treatment of commission earned in the hands of a long-term insurance broker

[FAQ] The VAT treatment of commission earned in the hands of a long-term insurance broker

• 18 November 2020
• VAT
• Christo Theron

Background

An insurance broker, who is an intermediary, earns commission from various insurance companies. The commission earned will now exceed R1million in a 12-month period. He is not involved in short-term insurance, he mainly does life cover and retirement plans. He is a registered financial service provider.

Is the commission earned by the insurance broker exempt from VAT?

Answer

The VAT Act

Section 7(1)(a) of the VAT Act imposes VAT on the supply of taxable goods or services by a vendor to any person. The section levies VAT at the standard rate of VAT (currently 15%) unless the supplies qualify to be made at the zero rate of VAT or are exempt from VAT.

Section 12(a) of the VAT Act defines financial services as an exempt supply.

“Financial services” is defined in section 1(1) of the VAT Act as the activities deemed to be financial services in section 2 of the VAT Act.

Section 2(1)(i) of the VAT Act deems the activities of the provision, or transfer of ownership, of a long-term insurance policy or the provision of reinsurance in respect of such policies as financial services.

The proviso to section 2(1) of the VAT Act determines that the activities contemplated in paragraphs (a), (b), (c), (d) and (f) of section 2(1) of the VAT Act are deemed not to be financial services to the extent that the consideration payable in respect thereof is any fee, commission, merchant’s discount or similar charge.

Section 23(1)(a) of the VAT Act determines that every person who carries on a VAT enterprise and is not registered as a VAT vendor becomes liable to be registered at the end of any month where the total value of taxable supplies made by that person in the period of 12 months ending at the end of that month in the course of carrying on all enterprises has exceeded R1 million.

Application of the principles

The proviso to section 2(1) of the VAT Act does not cover financial services as envisaged in section 2(1)(i) of the VAT Act. This means that a fee, commission, merchant’s discount or similar amount for an activity contemplated in paragraph 2(1)(i) of the VAT Act constitutes consideration for the supply of an exempt financial service.

Note though that the exemption contained in section 2(1)(i) of the VAT Act only applies in respect of  “the provision, or transfer of ownership, of a long-term insurance policy or the provision of reinsurance in respect of such policies”. It accordingly regulates the relationship between the insurer and the insured. Any relationship other than that between the insurer and the insured is governed by the normal VAT rules.

The supply of any services to a third party that is involved in “the provision, or transfer of ownership, of a long-term insurance policy or the provision of reinsurance in respect of such policies” would be one step removed from the exempt activities and would accordingly be a standard rated supply of a service for VAT purposes.

The above interpretation has been confirmed in SARS Ruling No 35 (a ruling issued before the introduction of the TAA and withdrawn subsequent its introduction, but nonetheless indicative of the interpretation in this regard). The Ruling determines that: “With effect from 1 April 1995 both long-term and short-term insurance commissions are subject to VAT at the standard rate in terms of section 7(1)(a) in consequence to the amendment of section 2(1)(n).”

The agent would accordingly have to register as a VAT vendor in the tax period following any 12-month period in which the value of the taxable commission exceeded R1 million.

Webinar Commentary

For further webinar commentary, view our webinar on VAT: Exempt supplies brought to you by The Tax Faculty.

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