Insurers need not charge or remit VAT on proceeds from salvage sales - The Case of Commissioner of Domestic Taxes v ICEA Lion General Insurance Company Limited

Full Case: Commissioner of Domestic Taxes v ICEA Lion General Insurance Company Limited
Income Tax Appeal E105 of 2023 [2025] KEHC 14865 (KLR)

Brief Facts:

ICEA Lion General Insurance Company Limited (“the Respondent”) is a general insurance company licensed under the Insurance Act, Cap 487, Laws of Kenya.
When an insured motor vehicle or motorcycle is involved in an accident and declared a total loss, the insurer indemnifies the insured by paying compensation equivalent to the insured value.

Upon such settlement, ownership of the wreck (salvage) transfers to the insurer by operation of law — under the doctrine of subrogation — or through express policy terms. The insurer subsequently disposes of the salvage through sale to recover part of the claim cost.

The Commissioner of Domestic Taxes (KRA) issued VAT assessments on these salvage sales, arguing that the disposals constituted taxable supplies of goods under the Value Added Tax Act, 2013. ICEA Lion objected, maintaining that such disposals form part of the insurance service, which is VAT-exempt under the First Schedule, Part II, Paragraph 1 of the VAT Act.

The Tax Appeals Tribunal (TAT) ruled in favour of the insurer. KRA appealed to the High Court.

Issues for Determination:

1. Whether the sale of salvage vehicles by an insurance company constitutes a taxable supply of goods under the Value Added Tax Act, 2013.
2. Whether such disposal forms part of the insurer’s exempt insurance service under the VAT Act.

Court’s Holding:

The High Court dismissed the appeal, upholding the Tribunal’s finding that VAT is not chargeable on the sale of salvage vehicles by insurance companies.

Court’s Reasoning:

• The court held that the sale of salvage is incidental and ancillary to the insurance company’s core business of providing indemnity to policyholders.
• Upon settlement of a total loss claim, the insurer acquires the salvage not as a trader in goods, but as part of the indemnification process.
• The subsequent sale of the salvage serves merely to mitigate the insurer’s loss — it is not a distinct or independent commercial activity for profit.
• Under Paragraph 1, Part II, First Schedule to the VAT Act, 2013, insurance and reinsurance services are expressly exempt from VAT. The court found that this exemption extends to activities inherently connected to the insurance service.
• Taxing the disposal of salvage would, therefore, amount to taxing part of the indemnification process, which contradicts the legislative intent of the VAT exemptions for insurance services.

Ratio Decidendi (Legal Principle):

The disposal of salvage vehicles by an insurance company following indemnification of a total loss is not a taxable supply under the VAT Act. Such disposal is ancillary to insurance services, which are expressly VAT-exempt under Part II of the First Schedule to the Value Added Tax Act, 2013.

Significance of the Decision:

• Establishes that insurers need not charge or remit VAT on proceeds from salvage sales.
• Affirms the principle that activities integral to or arising from the provision of insurance cover remain VAT-exempt, even if they generate monetary value.
• Provides clarity and tax certainty to the insurance industry, preventing double taxation or misclassification of insurance-related recoveries.

Commentary and Practical Implications:

1. For Insurance Companies:

• This decision offers welcome certainty in tax treatment of salvage recoveries. Insurers can confidently exclude salvage proceeds from VAT computation and reporting.
• It reinforces that VAT exemption applies not only to the insurance premium itself but also to transactions incidental to claim settlement.
• Insurers, however, must ensure proper documentation to demonstrate that such salvage arises strictly from indemnified claims and not from independent commercial trading in vehicles.

2. For the Kenya Revenue Authority (KRA):

• The ruling narrows KRA’s scope of assessment regarding VAT in the insurance sector.
• KRA must respect the distinction between commercial sales of goods and recoveries linked to indemnification.
• The decision emphasizes the need for tax authorities to interpret exemptions in light of the economic substance of transactions rather than their form.

3. For Policyholders and the Market:

• The decision supports stability in the insurance market by preventing unnecessary tax burdens that might otherwise be passed on to policyholders through higher premiums.
• It ensures that claim settlement remains efficient, as insurers can dispose of salvage without complex VAT compliance requirements.

4. Broader Legal Implication:

• The case strengthens jurisprudence on the scope of VAT exemptions under Kenyan law, confirming that ancillary or consequential acts forming part of an exempt service retain the exemption.
• It aligns with international VAT principles under OECD guidelines, which also recognize the “incidental to the main supply” doctrine.

Conclusion:

The High Court’s decision in Commissioner of Domestic Taxes v ICEA Lion General Insurance Company Limited affirms that the sale of salvage by insurers is not a taxable supply, but an activity incidental to VAT-exempt insurance services. This ruling provides much-needed clarity for insurers and ensures consistent application of VAT law within Kenya’s insurance sector.