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VAT, insurance and FRS

VAT, insurance and FRS

Hello

A client had an accident in his van, and claimed on the insurance. The insurance company asked if he was vat registered, he said yes, and received the expected invoice for the input vat on the repair.

Client is on the FRS. Has he any ground to reclaim this input vat? Is it covered in the FRS percentage?

Client has been advised to state to insurance company he is on the FRS therefore not to invoice him for VAT?

Help please

Thanks

Replies

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24th Feb 2016 16:43

FRS

I cannot see that he can claim the input tax. That is one of the consequences of using the Flat Rate Scheme. I would advise the insurer of his inability to recover the VAT.

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24th Feb 2016 17:00

Interesting

This is a jolly interesting question.  I've not come across this before.

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24th Feb 2016 17:04

However...

Following on from Les' answer:

I'd make it clear to them that he's on FRS as since the FRS % is calculated to average out the VAT recovery that a business would have if on the standard scheme then the insurer might take the view that the FRS compensates for the lack of recovery and so the out of pocket expenses are only the net loss. I know I would if I were them, but I will admit I have no practical experience of negotiating with an insurer of FRS matters and I haven't seen any policy documents that take it into account.

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24th Feb 2016 17:26

Silent

There's nothing in the FRS notice about insurance proceeds and how they should be treated.

However, you don't pay the fuel scale charge on flat rate "because you do not claim input tax on fuel".   So, although the differential between Flat Rate VAT and Proper Output Tax is clearly in lieu of input tax, HMRC are clear that input tax isn't being claimed.   Given that, I think that the claimant can honestly say that he isn't able to recover input tax despite being registered for VAT.

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24th Feb 2016 17:37

Why would you look there?

lionofludesch wrote:

There's nothing in the FRS notice about insurance proceeds and how they should be treated.

This is a matter between the insurer (who is compensating the insured for their loss] and the insured, and does not affect the FRS. The FRS affects the quantum of the insured's loss and there are two possibilities:

The incorrect one proposed by spidersong that the insurer should only meet the net of VAT cost, on the basis that the FRS takes care of the VAT element.One that compares the financial position of the insured without the loss and with the losss.

By the latter comparison, the insured's loss is the VAT inclusive amount in all cases other than where the insured incurs capital expenditure (eg by buying a replacement costing more than £2,000).

So what you do is you do not tick the box on the form that says you are VAT registered and then make a note saying that in fact you are VAT registered, but cannot recover the VAT because you are on the FRS.

Some scrote[***] then processes the form and does not tick the box in their computer that you are VAT registered. Job done!

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24th Feb 2016 18:09

Two boxes

Portia Nina Levin wrote:

So what you do is you do not tick the box on the form that says you are VAT registered and then make a note saying that in fact you are VAT registered, but cannot recover the VAT because you are on the FRS.

Some scrote[***] then processes the form and does not tick the box in their computer that you are VAT registered. Job done!

Usually there are two questions.

1.  Are you VAT registered ?

2.  If yes, can you claim all the VAT ?

I may have paraphrased somewhat.

It's aimed at the partially exempt but it works for the new FRS kid on the block just as well.

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24th Feb 2016 18:05

Because ....

Because I wanted to see what HMRC said about insurance compensation and, in particular, whether it should be included in FRS turnover.

Which turned out to be nothing.  Unsurprisingly.

For what it's worth, I don't see that it's part of FRS turnover.  It's a reduction of the policy holder's expense.

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24th Feb 2016 18:42

Not FRS turnover

lionofludesch wrote:

Because I wanted to see what HMRC said about insurance compensation and, in particular, whether it should be included in FRS turnover.

Which turned out to be nothing.  Unsurprisingly.

For what it's worth, I don't see that it's part of FRS turnover.  It's a reduction of the policy holder's expense.

The money received from or payment made by the insurer is not consideration for any supply by the insured to the insurer, so it is outside the scope of VAT. End of. The FRS notice is clear that you should exclude outside the scope supplies, even though it is completely frigging obvious.

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25th Feb 2016 09:23

Another obvious point ....

Portia Nina Levin wrote:
The FRS notice is clear that you should exclude outside the scope supplies, even though it is completely frigging obvious.

And if I hadn't looked, I wouldn't have known that.

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24th Feb 2016 19:07

Correctly complete the form

In his post at 18.09, Lion explains the key point beautifully, and the second question normally found is the very means which enables the claim to be paid correctly on a VAT-inclusive basis.  If however that second question does NOT appear on the form, then one must complete the form [together with the recommended attachment as explained below] correctly.  My comments below thus apply where the second question does NOT appear.

In completing the form, one has of course to answer all the questions correctly.  There are two possible methods of so doing, in relation to the question as to wether one is registered for VAT:-

[i] To answer "yes", but alongside that  answer one enters "But see the attached explanatory covering letter" [or similar]; and then of course attach a covering letter explaining that, since the VAT FRS applies, then the amount which the insurance company should pay must be the VAT-inclusive amount; or

[ii] To answer "No", but alongside that answer one enters "See the attached covering letter to explain the reason for this answer which, albeit strictly incorrect, will ensure that the payment made under the insurance claim is correctly the VAT-inclusive amount".

By adopting one of the two above options one ensures that :-

[i] One cannot be accused of completing the form incorrectly [the crucial "link" between the form and attached letter ensures this]; and
[ii] One receives the correct [VAT-inclusive] amount from the insurance company under the policy terms.

For the avoidance of doubt, I adopted the above procedure [in the partially exempt context] when previously advising clients, and no problems were encountered therefrom. 

With respect to PNL [and subject to the "caveat" below], his recommended course of action of answering "No", WITHOUT attaching a covering letter to explain the strictly incorrect response, could conceivably result in action against the policyholder for completing the form incorrectly, and is by definition contrary to the ethical standards which, as professionals, we should adhere to at all times.

The "caveat" referred to above relates to PNL's words of "make a note saying that in fact you are VAT registered" [in the penultimate paragraph of his post] -  I interpret those words as indicating that "a note" be appended to the claim form [as opposed to "a note" solely for one's own internal use]: as explained above, adding the "note" to the claim form is precisely what one MUST do.

In the early days of VAT, difficulties were encountered due, as Lion says, to the partial exemption rules; and the "second question" was introduced to accommodate such difficulties.

Basil.

 

Thanks (2)
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By reactbs
29th Feb 2016 11:55

Capital item

There are two answers here. Firstly the insurance payment is outside the scope & therefore does not go in Box 6. Secondly the purchase of a replacement van is likely to be a capital item (over £2k) and is therefore recoverable in Box 4. Provided of course there is no Partial Exemption issue :) Simples                                                                                                     

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29th Feb 2016 12:03

Replacement ?

reactbs wrote:

There are two answers here. Firstly the insurance payment is outside the scope & therefore does not go in Box 6. Secondly the purchase of a replacement van is likely to be a capital item (over £2k) and is therefore recoverable in Box 4. Provided of course there is no Partial Exemption issue :) Simples                                                                                                     

There's no replacement here.  The OP says the van was repaired.

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29th Feb 2016 12:04

Replacement?

reactbs wrote:

There are two answers here. Firstly the insurance payment is outside the scope & therefore does not go in Box 6. Secondly the purchase of a replacement van is likely to be a capital item (over £2k) and is therefore recoverable in Box 4. Provided of course there is no Partial Exemption issue :) Simples

Who mentioned replacing the van. Usual procedure when something gets damaged is to repair it, unless, of course, it is not economical to do so.

If the van were being replaced, then the answer would be simple, because if the VAT is recoverable (as you note it would be), there would be no issue over how to get the correct quantum of payment from the insurer, which was the nature of the original question.

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29th Feb 2016 12:11

I'm confused ...

... is the insurance claim included in FRS turnover?

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29th Feb 2016 12:13

Well...

kevinringer wrote:

... is the insurance claim included in FRS turnover?

... is it consideration for any supply?

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29th Feb 2016 12:15

No

kevinringer wrote:

... is the insurance claim included in FRS turnover?

It's outside the scope of VAT

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29th Feb 2016 13:23

No

kevinringer wrote:

... is the insurance claim included in FRS turnover?

See earlier posts.

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By reactbs
29th Feb 2016 12:15

Replacement

Apologies Portia - teach me not to skim. If repairing van then not recoverable. For "I'm confused" - no it is not part of turnover as Outside the Scope". Sorry.

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29th Feb 2016 12:54

FRS

Perhaps I am missing something totally obvious and, if so, I trust I will not be judged too harshly.

One of the advantages of being on the FRS is that one accounts for VAT at a rate - the flat rate - appropriate to the business. The FRS rates are set so as to take into account both the likely mix of supplies made by a business and the likely incidence of VAT on purchases. The flat rate is lower than the usual VAT rate so as to compensate a business for the input VAT that it incurs on relevant supplies. I see nothing in the FRS rules which would exclude the repairs from the definition of "relevant supplies" and so, surely, the fact that the business is not entitled to claim for the VAT on the repairs is because the FRS rate already compensates the business for that VAT? Under that analysis, therefore, the VAT on repairs is not a cost to the business because the business has an allowance to cover it. This brings us back to the question of whether the business truly suffered a loss in relation to the VAT on repairs if the FRS rate is set at a level to compensate for the VAT?

I believe that this could make for a very interesting court case if ever it was to get that far.

The only sensible position to take is to make a disclosure to the insurer and if the insurer suggests it won't reimburse the VAT, ask why not.

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29th Feb 2016 13:18

I repeat...

The insurer is obliged under the contract of insurance to compensate the insured for their loss.

The ONLY way to compute the amount of the loss is to calculate the difference between the insured's financial position with and without the loss. Any notional VAT that the FRS may or may not be taking account of is irrelevant.

Let us say that the insured in this case has made taxable supplies of £100,000 on which they have charged VAT of £20,000. Their FRS percentage is 15%, and they have other expenses of, say, £30,000. The van repair costs £5,000, plus £1,000 VAT.

With no accident, they would have accounted for FRS VAT of £18,000, leaving profits of £72,000 (£100,000 + £20,000 - £18,000 - £30,000).

With the accident, their profits are only £66,000 (£72,000, as above, less £6,000 VAT inclusive repair cost).

By how much is the insured party worse off as a result of the insured accident?

Because, subject to any excess, that is the amount that the insurer is obliged to pay.

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29th Feb 2016 15:39

PNL's "I repeat" has it correct here

Those of you arguing over tax law are largely missing the point here, I am afraid. It is all about compensation for loss.

Basil, I always thought PNL was a lady (or female, at least)....did I miss an email on this?

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29th Feb 2016 15:58

Shame on you for not being up to date on the EU gender reassignment directive.

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