Are we liable to pay VAT on insurance claim

KarrieP · 11 July 2012 at 3:28PM

Hi, hope someone can kindly advise.

My partner and I run a small business. 2 years ago we had a claim filed against us for injury. Our insurance company instucted us to accept liability and they set aside £20,000.

The claim has been settled but we have received an invoice for the VAT element of one of the solicitor's bills. We suspect this is not the final solicitors bill.

We are registered for VAT on the Flat Rate Scheme. If we were not Flat Rate we could reclaim the VAT we pay but as we are flat rate we can't reclaim any VAT, we simply pay hmrc at a lower rate.

Surely our insurance company should be paying this VAT invoice as part of settling the claim? What if the legal fees were tens of thousands of pounds? We would be bankrupt despite having public liability insurance up to £5,000,000.

Can anyone clarify this please?

Pennywise · 11 July 2012 at 4:29PM

Insurance companies aren't usually VAT registered as insurance is exempt.

I think you'll find that their T&Cs will state that the insured (you) is required to pay VAT on their costs if the insured (you) is VAT registered. The fact that you're on the FRS and can't reclaim isn't really relevant to the insurance company. You've benefitted from the FRS so have to take the rough with the smooth.

You may wish to consider leaving the FRS so that you can reclaim your input VAT - HMRC don't like you opting in and out, so you'd have to leave the FRS scheme for a year or so before going back in. You have to do the sums to see if it's worthwhile.

DCodd · 11 July 2012 at 4:45PM

VAT registered businesses pay the VAT element of any insurance claim. Something to bear in mind when claiming on any business insurance policy.

KarrieP · 11 July 2012 at 5:48PM

I've just found the following on The Law Society website:

Where the policyholder is partly exempt (and cannot recover all his input tax), or where the insurance does not relate to the policyholder's business, or, even if it does, the policyholder is not VAT-registered, the position will remain that Customs and Excise would expect any VAT invoice to be addressed to the policyholder. Unless he can partly recover input tax, there will be no object in actually delivering the invoice to the policyholder and it can be sent direct to insurers for payment as hitherto. In this situation also, Customs would have no objection to an invoice being addressed direct to insurers for the whole of the solicitor's bill, provided that it is clearly not a VAT invoice.

As we cannot recover the input tax I think this applies to us. I think we'll have to fight it with the insurers. I have asked them to tell us where in the T&C it states that we are liable for the VAT element.

Wywth · 11 July 2012 at 5:50PM

KarrieP wrote: »

...
We are registered for VAT on the Flat Rate Scheme. If we were not Flat Rate we could reclaim the VAT we pay but as we are flat rate we can't reclaim any VAT, we simply pay hmrc at a lower rate...

The difference between the full VAT rate you charge your customers and the lower VAT rate you submit to HMRC is to offset the input VAT you could otherwise claim.

You can't have your cake and eat it. You decided on opting into the flat rate scheme - no one forced you.

Slinky · 13 July 2012 at 7:37AM

I seem to recall that large items over £2K can fall outside of the flat rate scheme and you can claim VAT back (bit hazy on this as it's a long time since I read the paperwork and that level of expenditure hasn't occured in my business). Not sure if that would apply to an insurance claim though, could just be physical items purchased for the business.

antrobus · 13 July 2012 at 9:22AM

KarrieP wrote: »

....As we cannot recover the input tax I think this applies to us. I think we'll have to fight it with the insurers.

Then speak to the solicitors. What you have quoted is Law Society guidance for solicitors and has no bearing on what an insurance company might or might not do.

KarrieP wrote: »

.
I have asked them to tell us where in the T&C it states that we are liable for the VAT element.

They'll just quote VAT Notice 701/36 back at you:-

In the case of subrogated claims however (that is, claims where the insurer exercises their right to pursue or defend a claim against a third party in the name of the insured party) supplies of legal services in connection with those claims are made to the insured party and not to the insurer.

Slinky wrote: »

I seem to recall that large items over £2K can fall outside of the flat rate scheme and you can claim VAT back ...

I suspect you're thinking about capital expenditure;

If you use the flat rate scheme, you can reclaim the VAT you have been charged on a single purchase of capital expenditure goods where the amount of the purchase, including VAT, is £2,000 or more. (HMRC Reference:Notice 733)

Are we liable to pay VAT on insurance claim

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