CATEGORIES
- (1) Negotiating Tax Debt and Payment Arrangements with SARS
- (14)Accounting
- (2)Accounting for Income Tax
- (7)Administration of Estates
- (1)Application of tax rates, s6(2) rebates
- (1)Assessed losses
- (4)Audit, Reviews & Other Services
- (9)Blogs
- (8)Capital Gains Tax
- (1)Capital Gains Tax - Individuals Tax
- (1)Capital Gains Tax Implications of Trusts
- (2)Case study: Home office expense
- (1)Case study: Travel allowances
- (1)Company Formations
- (117)Corporate Tax
- (9)Customs and Excise
- (2)Deceased Estate
- (1)Deductions Pre-trade and prepaid expenses
- (1)Deferred tax assets and deferred tax on equity
- (1)Deregistration
- (2)Employer and Employee (PAYE and UIF Specific)
- (1)Estate Duty
- (5)Faculty News
- (2)Farming
- (142)Individuals Tax
- (1)Input - Customs Duty
- (3)Interest
- (13)International Tax
- (17)Legislation
- (1)Low interest rate loans and loan subsidies
- (1)Nature of the rights of beneficiaries
- (1)Notional input tax
- (8)Payroll
- (2)Practical Payroll
- (2)Provisional tax (Link with other Taxes)
- (1)SARS Dispute Resolution
- (4)SARS Issues
- (1)Salaried Employees
- (126)Tax Administration
- (2)Tax Administration Part 2B: Resolving Problems with SARS using the Tax Ombud
- (1)Tax Administration Part 3B Dispute Resolution - Objection and appeal
- (2)Tax Update
- (2)Tax implications of loans to trusts
- (1)Tax residence
- (1)Tax returns and payments
- (1)Transfer-Pricing
- (1)Trust Income / Gain Allocations
- (1)Trust types and income allocations
- (5)Trusts
- (66)VAT
- (3)VAT periods
- (1)Wear and tear allowances
- (1)Zero Rated
- Show All
[FAQ] VAT and insurance claims received due to fraudulent activities
- 30 August 2021
- The Tax Faculty Tax Specialist
This article is based on tax law for the year ending 28 February 2021.
Background
A taxpayer received an insurance claim. The loss incurred was due to unauthorised and fraudulent transactions (theft) perpetrated by a previous employee. As an audit was conducted to provide and prove the amounts, is there a possibility that output VAT in these instances will not be payable to SARS?
Answer
The VAT Act
Section 8(8) of the VAT Act determines that where a vendor receives any indemnity payment under a contract of insurance, the payment is, to the extent that it relates to a loss incurred in the course of carrying on a VAT enterprise, deemed to be consideration received for a supply of services on the day of receipt of the payment.
The first proviso to section 8(8) of the VAT Act determines that no output tax is payable where the contract of insurance is not subject to VAT (e.g. if the insurer is a non-resident insurance company that does not conduct a VAT enterprise in South Africa).
The second proviso to section 8(8) of the VAT Act determines that a deemed supply of services in respect of insurance proceeds received does 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 on under section 16(3) was denied in terms of section 17(2) …”
Application of the principles
Insuring against losses incurred as a result of fraudulent activities by employees is a specific business peril and directly linked to the operations of a business. The payment would therefore relate directly to a loss incurred in the course of carrying on an enterprise. The manner in which the amount of the loss has been determined and quantified is irrelevant in this enquiry.
Unless one of the provisos set out above applies, output tax would be payable on the receipt of the insurance proceeds. From the information supplied it is unlikely that the provisos will apply in the present circumstances.
Webinar Commentary
Refer to the following webinar: Monthly Tax Update - August 2021 here.