The South African Revenue Services (SARS) issued Binding General Ruling (BGR) 14 (Issue 2) in respect of VAT on specific supplies in the short-term insurance industry and BGR 32 in respect of reinsurance on 18 March 2016. The effective date for certain aspects was 1 June 2016 and will be 1 September 2016 for others. SARS is also in the process of finalising a BGR for inbound and outbound travel policies, to overcome the difficulties in complying with the VAT Act.

It is unlikely that members of the Industry (insurers, re-insurers and intermediaries) have to date, been compliant with the documentary requirements to support the application of zero rate VAT or the application of self-invoicing, as prescribed by Interpretation Notes (IN) 31 (issued in 2005) and 56, on the basis that they believed that the 1991 SARS ruling took preference and did not require any specific documentary proof. It is also likely that many members of the Industry may have had little regard to the rulings issued over the years which deal with apportionment of input tax on overhead costs, due to the receipt of non-taxable, in particular recoveries from foreign reinsurers. Unless members have applied and received rulings to use alternative apportionment methods, insurers who received substantial claims from foreign reinsurers in terms of reinsurance and retrocession agreements, are exposed to VAT excessively claimed.

BGR 14 and 32 contain various changes to the way in which the industry treated VAT over the last 25 years. It varies from changes in the application of the zero rate, excesses, policy documentation, apportionment of premiums, etc. The BGRs’ further prescribe documentary requirements in addition to those envisaged in IN’s 31 and 56. Most of these changes requires systems changes, changes in the VAT configuration of transactions, changes in claims settlement and a huge amount of awareness among stakeholders. SARS issued a Draft Guide on short-term insurance to assist members fully understand the implications of the very legalistic BGRs although the guide does not adequately address all the intricacies of the BGRs.

KPMG has developed a programme to do a General Accounting Practices analyses for members to assist them in forming a task team, consisting of the relevant disciplines, together to give effect to the changes required and to assess the compliance after implementation. The programme is also designed to identify historic exposures to VAT, 10 percent penalty, interest and understatement penalties (i.e. either 25 or 50 percent which came into effect 1 October 2012). KPMG has updated its VAT on Short-term Insurance Manual, which will soon be available in printed format.

Further, KPMG has developed material which highlights all the relevant changes brought about by the said BGRs. The next half day training session / seminar will be hosted on 4 August 2016 and will cover the impact of the new BGRs for the insurance industry, how to avoid pitfalls and remedial actions available. For further information regarding the seminar please contact Zandile Maseko on 060 962 2977 or email Zandile.Maseko@kpmg.co.za or taxandlegal@kpmg.co.za.