One of the most principles of VAT is neutrality, which means that VAT should apply uniformly across goods and services. This is ensured through a standard VAT regime coupled with the right of deduction on intermediate consumption.
An exemption regime, such as that applied to financial and insurance services, goes against VAT neutrality because it restricts the right of deduction for non-taxed activities. This results in a cost impact on business structures, competitive disadvantages, etc.
Life insurance services are exempt from VAT in the UAE, while general insurance attracts VAT at 5 per cent. Insurance companies providing vehicle cover are liable to charge VAT at 5 per cent on the premium. We will discuss the nuances of VAT around non-life insurance in general and, more specifically, motor insurance.
Settlement claims
Under a general insurance contract, a settlement made by the insurer in respect of a claim may either be by way of financial indemnification (payment of a monetary claim) or in-kind, where the insurance company agrees to arrange for repairs or agrees to replace the vehicle. In principle, settlements made by the insurer in respect of an insurance claim are outside the scope of VAT.
Excess or deductibles
An excess, or deductible, is the amount the insured must bear in the event of loss as a threshold before the insurer will pay the settlement claim. The amount paid by insurer will be the claim amount less the excess amount. The excess or deductible is not a consideration for any supply by the insurer, and as such, should be out of scope for VAT purposes.
Subrogation or reinsurance
There could be cases of reinsurance, subrogation, fraud, etc. under which an insurance company can recover part or whole of the cash payment made under the contract from another person.
Reinsurance is the practice of insurance companies to insure their risk of paying claims to insured in the event of a vehicle loss. The reinsurer will charge a premium for covering the insurance company’s risk and pay an agreed amount for any covered losses by the insurer, like any other insurance contract.
Subrogation is a term describing a right held by most insurance companies to legally pursue a third-party that caused an insurance loss to the insured. In most subrogation cases, an insurer pays its client’s claim for losses directly and then seeks reimbursement from the other party's insurer.
The amount received by the insurer under reinsurance or subrogation is not a consideration for any supply by it, and as such, should be out of scope for VAT purposes.
VAT on disposal of salvaged vehicles
The views on the applicability of VAT on disposal of salvaged motor vehicles are divided. Several countries treat it as a taxable supply, whereas a few treat it as being outside the scope of VAT.
Such a disposal by an insurance company is an incidental part of the insurance business. While the transfer of title to the salvaged vehicle from insured to insurer could be out of the scope of VAT, the sale to a third-party could be treated as a supply of goods. It may be noted that the transfer of title to the salvaged vehicle by the insurer to a third-party customer is not covered by the terms of the insurance contract between insured and insurance company. Hence, it could be treated on par with the normal supply of goods and could attract VAT.
One could also argue that there is no transfer of legal ownership of the salvaged vehicle from the insured to the insurance company upon indemnification of the loss. The insurer is merely disposing of what would have otherwise been disposed of by the insured.
The property - the vehicle - is not transferred or registered in the name of the insurer, at the time of disposal. As such, the disposal is not a supply in the hands of an insurance company for VAT purposes. This is also in line with the doctrine of subrogation. Thus, the insured may be required to discharge VAT, if applicable.
Input VAT on expenses
In a case where the insurer agrees to pay for repairs, a third-party workshop would provide repair services to the insured but would get paid by the insurance company. In such cases, the insurance company is not eligible for input VAT in relation to payments of monetary claims paid to the insured.
Generally, insurance contracts with VAT registered persons who are eligible for input VAT charged by the third-party vendor will state that claims will be paid exclusive of VAT. Whereas, for other persons, either not registered or not eligible for input VAT, the insurance claims will be paid inclusive of VAT.
The insurer could have a contract with third-party workshops to repair or replace the vehicle to satisfy their own obligation under the contract with the policyholder. In these cases, the insurance company will be the primary recipient of services, even though it is the insured who receives the benefits from the services.
Thus, the insurance company would incur VAT on such third-party workshop expenses. It would also incur VAT on fees paid to surveyors, adjustors, investigators, and other specialists. In these cases, the insurer would be eligible for input VAT as it would be the recipient of services.
