Jeffrey Wade
Insurance excess refers to the amount a policyholder must pay towards a claim, and it is generally an agreed-upon amount between the insurance company and the policyholder. When it comes to VAT on insurance excess, there are a few different scenarios to consider. If a business is VAT-registered and makes an insurance claim, the insurance company will typically not pay the VAT element of the claim. However, this does not mean the business has to bear the cost of VAT. For small claims, the insurance company may reimburse the business for costs minus VAT and the excess. On the other hand, for larger claims, the insurance company may arrange for repairs or new goods directly and request payment of the excess plus the VAT element. It's important to note that insurance transactions, including premiums received under contracts of insurance, are generally exempt from VAT, and VAT cannot be recovered on goods and services bought to make exempt supplies.
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What You'll Learn
VAT on insurance excess for builders
The application of VAT to insurance excess for builders is a complex issue that depends on various factors, including the type of property, the nature of the work, and the VAT registration status of the involved parties. Here is some information on how VAT applies to insurance excess in different scenarios:
When a builder carries out work for an insurance company, the handling of VAT on insurance excess can vary. If the builder is VAT registered, their invoices should typically include VAT. In some cases, they may need to invoice the policyholder for the excess plus VAT and then invoice the insurance company for the cost of goods or services minus the excess. This process ensures that the builder collects the necessary VAT on their services.
VAT on Rebuilding and Repair Costs:
For property owners, the application of VAT to rebuilding and repair costs can be confusing. In the UK, VAT typically adds 20% to the cost of goods and services, but there are exceptions. For example, VAT is not charged on the purchase of a new home, but it is applied when adding an extension to an existing house. Similarly, if a property is partially destroyed and requires repairs, VAT will need to be paid on those repairs. Property owners can usually recover this VAT from HMRC.
VAT Rates for Builder Services:
The VAT rate for builder services is typically 20%, but in certain situations, a reduced rate of 5% may apply. This lower rate is applicable in three main scenarios: the conversion of a non-residential building into a dwelling or a building for relevant residential purposes, work on a dwelling that has been unoccupied for at least two years, and projects resulting in a change in the number of dwellings. The 5% VAT rate can provide significant savings for property owners, especially when it extends to materials provided by builders.
VAT Registration and Insurance Claims:
When a business makes an insurance claim, the insurance company will inquire about its VAT registration status. If the business is VAT registered, the insurance company will generally pay the claim net of VAT, and the business will then claim the VAT element from HMRC. However, partly exempt businesses may encounter challenges in recovering the full amount of VAT, and they should carefully handle the claims process to ensure they do not miss out on their entitled VAT recovery.
In conclusion, the application of VAT to insurance excess for builders depends on a multitude of factors, and it is essential to seek professional advice from accountants or directly from HMRC to ensure compliance with VAT regulations.
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VAT treatment for small and large insurance claims
When it comes to the VAT treatment for insurance claims, there are a few things to consider, including the size of the claim, the type of goods or services involved, and whether the claimant is VAT registered.
For small claims, the insurance company may ask the claimant to pay the full repair bill and then reimburse them for costs minus VAT and their excess. If the repair bill is a business cost, VAT may be recovered, and the claim proceeds are treated as compensation, so they are not subject to VAT.
Larger claims may be settled differently. The insurance company may arrange for new goods or repairs directly and ask the claimant to pay only the excess plus the VAT element. The VAT treatment remains the same, and the claimant is entitled to recover the full VAT on the full costs of new goods or repairs. However, entering this into accounting software can be tricky. One suggested method is to enter it as a bill plus a credit note: a bill for the full amount of the goods and/or repair, including the VAT element to be claimed, and a credit note for the amount settled directly by the insurance company, which is not subject to VAT.
If a business incurs legal costs in connection with an insurance claim, it can recover the VAT charged, provided the claim is business-related. Partially exempt businesses may only recover a proportion of the VAT charged. If a business is VAT registered, the insurance company will typically pay the claim net of VAT, and the business will then claim the VAT element from the appropriate tax authority on its next VAT return.
It is important to note that the VAT treatment of insurance claims can vary depending on the specific circumstances and the location. It is always advisable to consult with an accountant or tax advisor to ensure compliance with the applicable laws and regulations.
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VAT-registered businesses and insurance claims
When a VAT-registered business makes an insurance claim, the insurance company will typically pay the claim net of VAT. The business can then claim the VAT element back from HMRC on its next VAT return. If the business is not VAT-registered, the insurance company will pay the full amount of the claim. This means that the business will not be out of pocket due to VAT.
For example, if a VAT-registered business claims damages to its company vehicle, and the repair costs £1,000 plus £200 VAT, the insurance company will reimburse the business for the net cost of repairs (£1,000), and the business can recover the £200 VAT as input tax from HMRC.
VAT-registered businesses can recover VAT on insurance claim-related expenses. For instance, if a business incurs legal costs in connection with an insurance claim, it can recover the VAT charged provided that the claim is business-related. Other services that are generally subject to VAT and can be recovered as input tax include loss assessment and claims management. However, partly exempt businesses may only recover a proportion of the VAT they are charged, which can create problems when making an insurance claim. In this case, it is recommended that the business does not tick the 'registered for VAT' box on the claims form but instead explains that it can only recover a proportion of its VAT.
It is important to note that insurance transactions are generally exempt from VAT, meaning insurance companies do not charge VAT on premiums collected from policyholders. However, VAT might apply to a business's repair or replacement costs when making a claim. In this case, the insurance company may reimburse the claimant for VAT-inclusive costs if they are VAT-registered.
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Partly exempt businesses and 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. If the business is VAT-registered, the insurance company will pay the claim net of VAT. The business can then claim 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.
Partially exempt businesses can only recover VAT in proportion to their taxable activities. Accurate records and calculations are essential for compliance. Insurance claims often involve additional services such as legal advice and claims management, which are generally subject to VAT. This 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 tick the 'registered for VAT' box, the insurance company will not pay them the VAT element, even though they can't reclaim any or all of the VAT. Therefore, a partly exempt business should not tick the 'registered for VAT' box on the claims form. Instead, they should 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.
If a business incurs legal costs in connection with an insurance claim, it can recover the VAT charged provided that the claim is business-related. For instance, 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.
VAT-registered entities can recover VAT on professional services related to claims. When goods are provided as indemnification, VAT is usually applicable. However, financial compensation is generally not subject to VAT. For example, a VAT-registered business that receives a replacement vehicle worth £10,000 plus £2,000 VAT as part of an insurance claim can reclaim the £2,000 VAT from HMRC. If the business received a cash settlement instead, no VAT would be involved.
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Reclaiming VAT on insurance claims
When a business makes an insurance claim, the insurance company will ask if the business is VAT registered. If the business is VAT-registered, the insurance company will pay the claim net of VAT. The business can then claim 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.
Partly exempt businesses can normally only recover a proportion of the VAT they are charged. This 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 tick the 'registered for VAT' box, the insurance company will not pay them the VAT element even though they can’t reclaim any or all of it. Therefore, a partly exempt business should not tick the ‘registered for VAT box’ on the claims form. Instead, they should 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.
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. For example, a business incurs £1,500 plus £300 VAT on legal fees related to an insurance claim. If the business is VAT-registered, it can recover the £300 VAT as input tax.
VAT-registered businesses can recover VAT on repairs or professional services related to claims. For example, a VAT-registered business receives a replacement vehicle worth £10,000 plus £2,000 VAT as part of an insurance claim. The business can reclaim the £2,000 VAT from HMRC. If the business received a cash settlement instead, no VAT would be involved.
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Frequently asked questions
VAT stands for Value Added Tax. It is a tax levied on the sale of goods and services, and it is usually included in the price that consumers pay.
No, insurance excesses are not VATable. Insurance transactions are generally exempt from VAT. If a business is VAT-registered and makes an insurance claim, the insurance company will not pay the VAT element of the claim.
Yes, if a business incurs legal costs in connection with an insurance claim, it can usually recover the VAT charged, provided that the claim is business-related. However, partly exempt businesses may only recover a proportion of the VAT.
Small businesses on a flat rate scheme do not need to include insurance payments in their turnover when calculating the flat rate percentage.
IPT stands for Insurance Premium Tax. Unlike VAT, IPT cannot be recovered. Care should be taken not to confuse the two, as they are two different taxes.
