Insurance transactions are generally VAT exempt. However, there are many issues that can arise concerning the VAT liability of certain insurance transactions. One of these issues concerns the VAT treatment of insurance claims.
Insurers are unable to recover VAT incurred in obtaining replacement goods or having repairs carried out for a policy holder. This supply is treated as being made to the policy holder regardless of who makes the payment to the supplier.
However, a VAT registered insurance policy holder can, subject to the normal rules, recover the input tax incurred. For this reason, the insurer will normally pay the policy holder compensation exclusive of VAT. This is why most insurance claim forms ask the policy holder if they are registered for VAT. Where the insured party is able to recover the VAT charged the insurer will only be responsible for paying the net amount due.
There are scenarios, such as when a business is partly exempt, where the business may not be able to recover the input tax in full. This complication needs to be resolved between the policy holder and insurer. HMRC does not get involved in resolving issues that arise in this way.