New VAT rate and short-term insurance: How has this affected you?

As you will remember, the Minister of Finance announced a VAT increase from 14% to 15% during his budget speech in February 2018. The effective date for this increase was 1 April and Eqstra Financial Services implemented it on your insurance policy issued on behalf of Guardrisk Insurance Company. 

We would like to revisit this matter briefly to refresh your memory on how it was approached and what the effects on you may have been.

In essence, any new deals loaded on or after 1 April 2018 incurred the new VAT rate of 15%. However, should a contract have been signed before 1 April, then the previous VAT rate of 14% still applies, provided the commencement date was not adjusted.   Should the commencement date on older transactions change to 1 April or after, the new VAT rate of 15% applies.

In general terms the new VAT rate applies to premiums for cover periods commencing on and after 1 April 2018, and that includes any policy premium payment due on or after 1 April 2018.

For example, for monthly paid premiums, a VAT inclusive premium of R114 paid by debit order for the cover month of March will increase to R115 for the cover month of April and thereafter.

In terms of the general transitional rules for VAT in the event of a rate change, in respect of annual policies for cover periods incepting before 1 April 2018, VAT will apply at 14% but only if the premium was paid before 1 April 2018. Where payment was received after 1 April 2018, 15% will apply to the period after 1 April 2018.

Communication to policyholders

Please note that insurers were not required to inform policyholders of the increase in premiums resulting from the increase of the VAT rate as it was due to the application of legislation. It was also not a change that was subject to the customary 30 day prior-notice period to policyholders. However as a courtesy we informed all our Brokers and customers about the change before 1 April 2018, as we believed it was the right thing to do.

Impact on claims settlements

Regardless of policies having been written including VAT at 14% at the time a claim arose, claims will be settled including VAT at 15% with effect from 1 April 2018.

Impact on policy documentation

There is no requirement to re-issue policy documentation showing VAT at the new rate of 15%. Policy documents will only be re-issued showing the new rate at the time of annual renewal (for annual policies) or annual anniversary date (for monthly paid policies) or when policy documents are issued following other changes made to the policy.

For VAT invoice purposes, where policyholders are VAT vendors, a policy document showing VAT at 14% when supported by evidence of payment of premium at 15% will constitute a valid tax invoice so as to permit deduction of a VAT input credit of 15%.

Insurance Contracts

Excess values will be adjusted downwards so that the total excess inclusive of VAT remains the same. This is in keeping with industry standards.

Quotations

Quotations that were quoted with 14% VAT will attract VAT at 15% if the contracts were activated after the VAT increase.  Note that the exclusive VAT amount will not change. 

Extended Warranty Contracts – March Policies

Extended warranty policies sold to customers during the month of March and after will be processed with 15% VAT. 

Credit Notes and Debit Notes

Any credit notes issued on or after 1 April 2018 that specifically relate to an invoice that was generated with 14% VAT, will have VAT applied at 14% too. 

If a credit note is passed in respect of an old invoice, and a new invoice associated to the old invoice is raised after 1 April 2018, the new invoice will be generated with 15% VAT.

Supplier Invoices

Any invoices that had an invoice date on or before 31 March 2018 will be processed with 14% VAT.  Any invoices with an invoice date on or after 1 April will be processed with 15% VAT.

We trust that this has clarified some of the uncertainties that may have come up after the implementation of the increased VAT rate of 15%.   

Contact us below to receive further information:

*Eqstra Financial Services Pty Ltd (EFS), FSP 46229, is a cell captive administrator and a non-mandated intermediary

that undertakes to assist policyholders implement positive steps to lower fleet costs by creating an accident

reduction culture.