What are the implications of the new Finance Act on your insurance premiums?

I started writing this article in July, just after the new Finance Act was signed off. Unfortunately, owing to a massive amount of ambiguity, not in the Act itself, which is reasonably clear, but how this affects you as a policyholder in Kenya, I have had to seek advice and clarification from our own professional advisers and, more importantly, the insurance market. Unfortunately, only one Insurer has made an announcement and their view is that for VAT registered policyholders, you need to allow for VAT when setting your sums insured and increase the figures by 16%.

🤔🤔🤔 Hold on a moment…is that absolutely correct? Well, honestly, I am not sure, and I do not want to commit to anything. Yes, prudence suggests you should act as outlined, but that will mean paying higher premiums and there is a risk you will be wasting premiums.

Let me try to explain, and for simplicity’s sake, I will tell you how it is done in the UK, certainly for the 43 years I’ve been in that market.

Example 1 – Jeremy (NOT VAT registered) buys a TV

I go to my local electrical store and purchase a new television for KES 100,000, within that figure is the VAT charged by the electrical shop. The electrical shop, in effect, have collected the VAT from me, and will send that to the KRA in their usual returns.

Personally, I am NOT VAT registered, so I do not get involved in the VAT issue. Three months later, I knock my TV over and it is completely damaged. I put in an insurance claim for the exact same TV, which is insured for the same price and under my JWS insurance policy and I claim the full KES 100,000. I will receive a settlement of KES 100,000 from my Insurers as I did not claim VAT in the first instance. The TV retailer has my KES 100,000, so, once again, they will have accounted for VAT and paid the KRA accordingly.

Example 2 – Jeremy Metalworkers Ltd (VAT registered) buys a lathe

My business is expanding, and I purchase a new lathe for my business at a cost of KES 1,160,000 including VAT. I pay the supplier the full amount and, as a VAT registered business, on my next return, I claim back the VAT KES 160,000 from the KRA.

A few months down the line, I have a small fire, and amongst other machinery and stock, I claim for a replacement lathe. I advise my Insurer via my Broker, that I am VAT registered. The Insurer, rightly, asks me for a final invoice and I send it to them, which shows the sum of KES 1,160,000, i.e. the original cost including the VAT. The claim should be settled at KES 1,000,000 and I claim the other KES 160,000 (VAT) on my next return to the KRA. It is therefore settled at KES 1,000,000, which is the net cost to me.

To me, it all makes sense and works so well. Unfortunately, here in Kenya, I am not so sure it will work like that. The suggestion here is that, when you receive the KES 1,000,000, YOU as Jeremy Metalworkers Ltd will have to account for 16% of the KES 1m. In effect, you are losing that sum on an insurance claim!

I am not suggesting that anyone is going out of their way to be unscrupulous, but I do believe that Insurers do not want to fall foul of the KRA and have to account for your VAT if you, the Policyholder does not remit the VAT. So, best they deduct it from your settlement and leave you to fight it out.

As mentioned, I have asked all our major Insurer partners and, to date, I have nothing concrete to advise you. To protect you and ourselves, I am saying to you, you should ensure that your sums insured should include VAT when setting them, whether VAT registered or not, and I am asking our partner Insurers if they will endorse our policies to state that ALL CLAIMS payments will always be inclusive of VAT. This way, there will never be any question, but it does mean you will have to increase your sums insured and pay that extra premium, if you have not already done so.

Apologies if I have not made this clear, but to be honest, I’m as confused as most people!

If you have any questions on the above or can shed some light on the situation, please reach out to Jeremy on [email protected].

If you would like to discuss your insurance policies, please get in touch: Email:[email protected]  or Tel: + 254 (0) 709 455 000.

** Please note, these views and comments are our own interpretation of the Act and is not definitive. Other parties to any insurance matter, might have different views and interpretations and we cannot be held responsible for any deviation from the above.