VAT Rate Change – General Notice to Clients


Dear Aon Client,

The Minister of Finance in his budget speech to Parliament on 21 February 2018 announced an increase in the VAT rate from 14% to 15% effective from the 1 April 2018.

The supply of short-term insurance constitutes a taxable supply of services for VAT purposes, and is subject to VAT at either the standard rate or the zero-rate.

The Financial Services Board (“FSB”) has confirmed the industry view that as the increase in premiums is due to the application of legislation it is not a change that is subject to the customary 30 day prior-notice period to policyholders. However the FSB fully supports the need to bring the effects of the change to the attention of policyholders.
The following sets out the key issues arising from the change that will generally affect Aon clients who are short-term insurance policyholders. Please refer to your Aon Client Relationship Manager should you have any specific queries about the change and how it will affect your particular insurance arrangements.

Impact on premiums

In general terms the new VAT rate applies to premiums for cover periods commencing on and 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. You can apply the following simple formula to estimate the change on other VAT inclusive amounts:
VAT inclusive amount at 14% VAT x 115 / 114 = VAT inclusive amount at 15% VAT.

Annually paid premiums for new policies and renewals for cover periods commencing on and after 1 April 2018 will include VAT at 15%.

No adjustment for VAT is required for annual policies with cover that commenced and the premium was paid before 1 April 2018. However where such premium is not paid by the end of March, according to the transitional VAT rules, VAT at 14% applies to the cover period before 1 April 2018 and 15% to the cover period thereafter. This causes significant difficulties and disruption across the industry. The industry is still engaged in seeking a ruling from SARS to allow the application of 14% across all such outstanding premiums. Further advices will follow. Please be guided accordingly and before settling any such outstanding premium after the end of March please contact your Aon Client Relationship Manager to ascertain any increase to the amount due.

Where quotes have been issued at 14% VAT in respect of cover commencement periods on and after 1 April 2018, the premium collected will include VAT at 15% and not the 14% previously quoted.
Impact on Value-add Products (“VAPS”) and 24 hour Care-Line Services

VAP and Care-line charges raised on and after 1 April 2018 will attract VAT at 15%. Generally product and service providers will increase their charges in line with the increase to the VAT rate on or as soon as possible after 1 April 2018.

Impact on Aon fees

Broker Service Fees charged on and after 1 April 2018 will attract VAT at 15% and will increase accordingly on or as soon as possible after 1 April 2018. Broker Mandated Fees charged by way of VAT Invoice will attract VAT at 15% for all work invoiced during and after April 2018.

For more information on Aon fees please refer to the Aon Risk Services Financial Services Guide on our website at www.aon.co.za.

Impact on sums insured and claims settlements

For policies with periods of cover commencing before 1 April 2018, where premium and sums insured include VAT at 14%, insurers will settle claims including VAT at 15% from 1 April 2018. This will ensure continuity of VAT inclusive levels of indemnity selected by policyholders. In effect this means that sums insured will be deemed to have increased for the increase in the VAT rate when claim settlement values are being considered.

Impact on Excesses

In principle excesses being the policyholder share of any VAT inclusive loss should increase by 115/114 with effect from 1 April 2018.

Where an excess is expressed as a percentage of the claim value then when this percentage is applied to the claim value that includes VAT at 15% the excess will also include VAT at 15%.

Where an excess is expressed as a fixed amount, while such amounts should be increased for VAT at the new rate (e.g. an excess of say R1 000 should become R1 008.78). Insurers will generally not immediately change such fixed amount excesses that will be addressed individually by insurers.

For our Commercial and Corporate clients with self-funding and aggregate deductible arrangements any changes will be individually advised by your Aon Client Relationship Manager who will also be able to explain the impact on the settlement of third-party claims and the associated VAT payable under section 8(8) of the VAT Act.

Impact on Policy Documentation

Generally neither Aon nor your insurer will re-issue policy documentation in respect of policies with periods of cover commencing before 1 April 2018 to show VAT at the new rate of 15%. Policy documents will only be re-issued showing VAT at 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 as a result of other changes made to coverage under your policy.

Policy documents for new policies with periods of cover commencing on and after 1 April 2018 will generally be issued showing VAT at the new rate of 15%. Where this is not possible, for example for covers commencing in April where policy documentation was prepared and distributed in say February, policy documents will continue to show VAT at the old rate of 14% and the transitional arrangement set out above in respect of policies current at 1 April 2018 will apply.

In this regard, for tax invoice purposes in the hands of policyholders who are VAT vendors, SARS has confirmed that 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%.

Impact on Aon Healthcare clients

The above will be of information to all Aon clients whether or not your short-term insurance is arranged by Aon. For those who are clients of our Healthcare division there are a few more matters to bring to your attention.

Medical scheme clients do not pay VAT on their medical aid contributions. The increase in VAT may influence the price of the medical schemes’ service providers, but it will not impact on current registered contributions or benefits and we do not expect the major medical schemes to submit contribution increases to CMS.

VAT is however payable on short-term insurance products (including GAP cover) and premiums for these products will therefore increase with the 1% VAT increase.

Common approach

The change in VAT rate is a significant administrative and logistical exercise in the short-term insurance industry that is made more difficult through the short lead time for change. Being an indirect taxation method aimed at individuals and entities that are non VAT vendors, the VAT inclusive cost of insurance to this sector will increase. The increase should have no effect on the VAT exclusive cost of insurance to policyholders who are VAT vendors.

The South African Insurance Association (“SAIA”) is making a Public announcement in national media about the change in the VAT rate in the next few days referring to a General communication on their website www.saia.co.za. A copy of this is also available on the website of the Financial Intermediaries Association of Southern Africa (“FIA”) www.fia.org.za.

Should you have any queries or wish to discuss any aspect, please contact your Aon Client Relationship Manager.