VAT and insurance claims

When a business suffers a loss and makes an insurance claim, the insurance company will ask if the business is VAT registered. The normal position is that if the business is VAT registered, the insurance company pays net of the VAT. The business then claims the VAT element from HMRC on its next VAT return. If the business is not VAT registered, the insurance company pays
the full amount of the claim, including the VAT.

What if the business is partly exempt?

Partly exempt businesses can normally only recover a proportion of the VAT that they are charged. This then creates a problem when they make an insurance claim, as the insurance company simply asks them if they are registered for VAT or not.

If they are registered for VAT, the insurance company may not pay them the VAT element even though they cannot reclaim any or all of the VAT.

Most claims departments in insurance companies do not really understand how VAT works, so businesses should not tick the registered for VAT box – enclose a note explaining that the business is only entitled to recover a proportion of its VAT and state the percentage of VAT that it can recover based on its last VAT quarter.

Example: Ensuring the insurance payment is correct

If the business can recover 70% of the VAT in the previous quarter, the insurance company should pay it 30% of the VAT – the proportion of the VAT that it cannot claim from HMRC.
The business may need to explain the matter over the phone before it gets the insurance company to accept that the claim is correct.

What if input tax recovery is blocked?

Some goods have a block on the recovery of input tax. For example, if there is any private use of a car, the business cannot recover any of the VAT. If a company car is written off and there is any private use, the business should inform the insurance company that it cannot recover the VAT so that they can pay the claim inclusive of VAT.

The input tax block does not apply to the repairs of motor cars. Even if there is mixed business and private use of the car, all the VAT on the repair can be claimed from HMRC, so the payment from the insurance company should be net of VAT. For more information, see HMRC VAT guidance

Don’t expect any help from HMRC!

If a business has difficulties getting the insurance company to accept that some or all the VAT is payable on the claim because it cannot claim it from HMRC, even though it is VAT registered, HMRC specifically states that it will not get involved in disputes of this nature and will not assist the business.

What about the money a business receives?

Businesses are often concerned that they have to account for VAT on the money they receive from the insurance company. However, there is no need to worry, as the insurance payment is treated as compensation and therefore outside the scope of VAT.

Businesses on the flat rate scheme for small businesses need not include insurance payments in their turnover when calculating the flat rate percentage.

Practical tip

If a business is registered for VAT, the insurance company will only pay the claim net of VAT. If it cannot recover all of its VAT or there is a block on VAT recovery on the goods being claimed for, the business will need to negotiate with the insurance company in order to recover the correct amount of VAT.

Disclaimer: The information provided on AccountingFirms.co.uk is for general informational purposes only and should not be considered professional accounting, tax, or legal advice. Always consult a qualified accountant or tax adviser for advice tailored to your individual circumstances.