VATFIN2850 - Money (including transfer of money) and related services: securities for money, credit guarantees and related services: surety bonds and performance guarantees

Surety Bonds

A surety bond is not a bond for the purposes of Group 5, item 6 but may be a security for money.

A surety bond is an agreement providing for monetary compensation in the event of failure to perform specified acts within a stated period. For example, a firm that stands surety becomes responsible for the fulfilment of a contract if the contractor defaults. Usually the firm that stands surety will provide some sort of monetary compensation equivalent to the loss resulting from the default.

Performance guarantees

The term performance guarantee is very vague and is often interchangeable with ‘performance bonds’. Although bonds fall within Group 5, item 6(a), some products described as bonds are not securities and therefore cannot be exempt under this item.

For example, a company decides to issue performance guarantees in connection with the sale of vehicles at motor auctions. The buyer of a car at auction pays for the performance guarantee so that, in the event title cannot pass (for example because the seller did not have true title), the buyer can seek compensation from the issuing company. The issuing company then pursues recompense from the seller of the car.

Liability

Where a surety bond guarantees payment of money where the debtor defaults it would fall within item 1.

The performance guarantee is taxable at the standard rate because it is not a security for money. This also applies to surety bonds which do not guarantee payment of money where the debtor defaults. They are not financial instruments (i.e. a kind of ‘IOU’ from a borrower to a lender) that guarantee that a sum of money will be paid at some specified time.

Whilst these products are similar to insurance, they are not contracts of insurance. For further information concerning insurance you should read VATINS3710.