VIT13500 | VAT Input Tax basics: insurance claims

Insurers cannot recover any VAT incurred in obtaining replacement goods or having repairs carried out for a policy holder. The supply of goods (or services in the case of repairs) is considered to be made to the policy holder. This is so even when payment is made directly to the supplier by the insurer.

Subject to the normal rules a VAT registered policy holder may treat any VAT incurred on the supply as input tax. The insurer will normally pay the policy holder compensation exclusive of VAT. The policy holder will pay the supplier the tax and recover it as input tax.

If an insurance claim is for loss or damage at a domestic property you should make sure that any VAT claimed as input tax relates only to goods used for a business purpose.

For VAT purposes payments received by policy holders from insurers are treated as compensation for the loss incurred. They are not consideration for any supply made by the policy holder.

In the case of repairs to motor vehicles all the VAT incurred may be claimed as input tax even if there is mixed business and private use of the vehicle.

Most insurance claim forms ask the policy holder if they are registered for VAT. The insurer will either make a tax inclusive or tax exclusive payment to the policy holder depending upon the answer.

However, answering yes to this question does not establish entitlement to recover input tax on the lost or damaged goods. The policy holder and insurer should resolve the matter between themselves if the policy holder is not entitled to make full recovery of input tax. This could be due to non-business use or because the taxpayer is partly exempt. HMRC staff will not negotiate on behalf of either party.

Some policies provide insurance against the cost of legal services which may be required in connection with an insurance or indemnity claim. As with other supplies of goods or services, where payment is made by the insurer the provision of legal services is regarded as being made to the policy holder. Input tax may be deducted by the policy holder in cases where the legal services are used for the purpose of the business.