Sarah Offord
Chartered Management Accountant
Midas Accountancy
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VAT Treatment on Insurance Claim

VAT Treatment on Insurance Claim

My client is a builder and has quoted for a repair job which will be reclaimed on insurance. He will be invoicing the insurance company directly for his services. The insurance company has assured him that they will not pay the VAT on his invoices.

I've trawled through the HMRC website and found the following guidance which seems pretty clear cut to me:
"UK law also specifically excludes services supplied in settlement of an insurance claim from the exemption. For example, where a pipe bursts and the insurer pays for a plumber to repair the damage so that the insured party receives plumber’s services rather than a sum of money from the insurer in settlement of the claim, the plumber’s services are not insurance related and will be liable to VAT in the normal way."

Does this mean therefore that the builder is expected to take the hit on the VAT? According to the above he must charge VAT on his invoice to the insurance company. But as a supplier of insurance they are not entitled to reclaim the VAT on his invoice, hence why they are saying they will not pay the VAT on his invoice. The client who has engaged the builder is an individual looking to carry out repairs on his home so he cannot reclaim the VAT. Surely this can't be right?

Many thanks in advance to anyone who can clarify this, or let me know if there is a particular way of dealing with such issues.



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By neileg
04th Feb 2013 13:11

It isn't right

The supply of services is to the insured, not the insurance company. The fact that the plumber gets paid direct is an administrative convenience. So the supply is liable to VAT.

Where the insured is a VAT registered trader and can reclaim the VAT, then he is out of pocket by the net amount and that's what the insurance company pays out.

Where the insured is not VAT registered then their loss is the full amount of the bill and the insurance company pays the full amount.

So it seems that somewhere along the road either the insurance company believes their customer can reclaim the VAT or more likely, they just got it wrong!

Of course it's what the policy states that matters but I'd be very surprised if the insurance company has a get out on the VAT.

Thanks (1)
04th Feb 2013 13:28

Should I advise the client to invoice the insured and the insured to reclaim the total value of the invoice (including VAT) from the insurance company to avoid confusion?
Many thanks for taking the time to answer!

Thanks (0)
By neileg
04th Feb 2013 13:52

I think...

I'd try and find someone who knows what they are talking about at the insurance company before you raise the invoice. These kind of wrangles can drag on forever!

What kind or order or instruction did the plumber get in the beginning and what did it say about VAT?

Thanks (1)
By chetan
04th Feb 2013 14:31

The insured party has probably told the insurer that they are registered for VAT (either when they bought the policy or when they made the claim).  In such a situation the insurer pays the net amount and the insured party pays the VAT and then reclaims it.  Further information here.

Your client should confirm that the insured party will pay the VAT before he commences work.  Also, the invoice would need to be addressed to the insured party, not the insurance company.  If the insured party is not VAT resgistered or cannot recover the VAT for any reason then they (the insured party) should get in touch with the insurer to clear up the misunderstanding before your client starts work.

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