Andrew Needham looks at the issues surrounding the reclaiming of VAT on 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 will pay the claim net of 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.
If a business incurs legal costs in connection with an insurance claim, it can recover the VAT it is charged provided that the claim is business-related.
What if the business is partly exempt?
Partly exempt businesses can normally only recover a proportion of the VAT 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 will not pay them the VAT element even though they can’t reclaim any or all the VAT. Most claims departments in insurance companies don’t really understand how VAT works, so a partly exempt business should not tick the ‘registered for VAT box’ on the claims form, instead, 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 was entitled to recover in its last VAT return.
Example: Partially exempt business
If the business can recover 70% of the VAT in the previous quarter the insurance company should pay them 30% of the VAT – the proportion of the VAT that it can’t 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 at all, 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 repairs of motor cars. Even if there is mixed business and private use of the car, all the VAT can be claimed from HMRC, so the payment from the insurance company should be net of VAT.
Don’t expect any help from HMRC!
If a business has difficulties getting the insurance company to accept that some or all of the VAT is payable on its claim because it can’t claim it from HMRC even though it is VAT registered, HMRC specifically says that it will not get involved in disputes.
What about the money received?
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; 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 the business can’t recover all 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.
