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Inland Revenue Explains VAT Implications on Insurance Indemnity Payments

Allowing a deduction for an indemnity payment is unusual under the VAT regime in that the registered person is not acquiring any goods or services, they are simply making a cash payment to the insured person. However these deductions are necessary so that the same treatment is given to indemnity payments as is given to payments made by the insurance company for replacement goods supplied to the insured person.

It is important to note that section 19(4) (e) of the VAT Act No 12 of 1998 [CAP 247] provides that insurance companies are entitled to claim 1/9th of indemnity payments only if the following conditions are met:

  • the supply of insurance cover was a taxable supply;
  • the payment is not in the form of goods or services;
  • the supply of insurance cover was not a zero-rated supply made to a person who is both non-registered or a non-resident of Vanuatu;
  • the payment is not to indemnify the registered person for loss of employment service earnings.

With regards to taxable incomes the VAT Office reminds the insurance companies that the following incomes must be taken into account when calculating their VAT liability as these items represent taxable supplies to an insurance company.

  •  Premiums charged (excluding premiums charged on exempt supplies such as life insurance)
  • Salvage recoveries (in some cases damaged goods that have been written off are sold by the insurance company – these sales are treated as normal supplies and are subject to VAT)
  • Third party recoveries (insurance companies are required to account for VAT on amounts received from third parties, for example, a registered person may be involved in a car accident and it is decided that the other person involved is responsible and therefore the other person’s insurance company pays the registered person’s insurance company the indemnity)
  • Sales of business assets (as is the case with any registered person, the sale of any business assets by the insurance company is a taxable supply)
  • Recoveries received from VAT registered reinsurers (insurance companies sometimes reinsure goods they have insured in order to spread their risk. When the insured person makes a claim, the insurance company also makes a claim with the reinsurer – the insurance company is liable to account for VAT on any such recoveries).

Furthermore, if you are a VAT registered person and your VAT registered business receive and indemnity payment (money) to compensate for the loss incurred to your business, for example by Tropical Cyclone Pam, the payment received will be subject to VAT, if the insurance cover was a taxable supply. 

The VAT Office will uplift the relevant information’s from the insurance companies and will conduct third party checks on those registered persons who have received indemnity payments to make sure that VAT is accounted for in the appropriate VAT returns.

The VAT Office is encouraging registered persons to get it right from the start and if in doubt to contact the VAT Office or refer to section 19(4) (e) and section 3(4) of the VAT Act No.12 of 1998 for correct and legal VAT determinations on insurance indemnity payments in Vanuatu. 

For more information on any of our articles published in our weekly column, please contact the VAT Office by phone: 00678 24573 or email us at This email address is being protected from spambots. You need JavaScript enabled to view it.