Business Daily (Nairobi)

Kenya: How Insurers Can Recover Value Added Tax

opinion

The value-added tax position of insurance companies is often complex, in terms both of the liability of particular supplies and of the recovery of related input tax. VAT is often a considerable burden to insurance businesses due to the amount of irrecoverable VAT incurred on.

Insurance companies apply a significant proportion of their premium income towards the settlement of claims and related expenses.

According to the Kenyan Valued Added Tax Act, insurance services are exempt from Value Added Tax (VAT). The effect of this is that any VAT charged to the insurance companies cannot be recovered and is thus cost to the insurance companies.

On the other hand, most of the services supplied to insurance companies are taxable. These include services provided by lawyers, investigators, motor vehicle garages, assessors and loss adjusters.

The VAT charged by these and other suppliers is, currently, expensed by the insurance companies. However, is this really the correct position?

There are two categories of supplies for which the insurance company is bearing the cost, including the VAT element.

The first category comprises supplies which are made to the insurance company. These include supplies such as stationery, office utilities, audit services and information technology supplies which are for the primary benefit of the insurance company.

The VAT on such supplies is not recoverable because the insurance company, which is recipient of the supplies, makes VAT exempt supplies.

The second category comprises supplies which are made to the insured, but whose cost is met by the insurance company as a means of indemnifying the insured person when he suffers a loss under the insurance contract.

The current practice in the Kenyan insurance industry is that the insurance bears the full cost of these supplies, including the VAT element.

Based on our review of the Kenyan VAT law, where supplies of claims-related goods or services are made to the insured party and the claim relates to their VAT registered business, any VAT incurred on those supplies may be deducted as input tax by the insured subject to the input tax prohibition order.

Where the insured party is able to recover the VAT charged in respect of such, the insurer would be responsible for paying only the net amount due under the insurance claim.

On the other hand, where supplies of claims related goods and services are made to the insurer, the input VAT incurred on those supplies would not be recoverable because insurance services provided by the insurer are VAT exempt.

Our understanding is supported by the prevailing practice in other countries with similar legislation.

The Kenyan VAT Act defines "input tax" as: tax paid on the supply to a registered person for any goods or services to be used by him for the purposes of his business; and tax paid by a registered person on the importation of goods or services to be used by him for the purposes of his business.

The VAT Act further provides that input tax may be deducted by the registered person from the tax payable by him on his supplies (i.e. output tax).

This provision enables a registered person to recover his input tax from the Commissioner and, therefore, the input tax does not form part of his cost. In relation to claims, it is important to establish who is receiving supplies made in connection with or in settlement of insurance claims because this will determine who could have the right to recover any VAT charged on those supplies as input tax.

Where supplies of claims-related goods or services are made to the insured party and the claim relates to their VAT registered business, any VAT incurred on those supplies may be deducted as input tax by the insured subject to the input tax prohibition order.

Where the insured party is able to recover the VAT charged in respect of such, the insurer would be responsible for paying only the net amount due under the insurance claim.

On the other hand, where supplies of claims related goods and services are made to the insurer, the input VAT incurred on those supplies would not be recoverable because insurance services provided by the insurer are VAT exempt.

There are several expenses which the insurance companies can save on the VAT element, but ensure that there is justification for determining that an expense qualifies for VAT deduction.

This is a significant step in ensuring that insurers realise savings. Insurance companies will recover a significant portion of the VAT that is currently being expensed.

The writer is a director with Viva Africa Consulting Limited.

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