If you are VAT registered and make an insurance claim, beware you could be inline for a large bill.
When you operate a business, whether that be a sole trader, partnership or Limited Company you always have to expect the unexpected. You can work very hard to control your costs and ensure that you have planned for every eventuality, but when it comes to being involved in a road traffic accident, fault or non-fault, there will always be an element of stress and unexpected costs.
Premiums within the industry have repeatedly increased year on year, with some policyholders choosing to increase their insurance excess in the hope of trying to keep premiums lower. Thankfully with policies today insurers can act reasonable quickly to provide you with a replacement licensed like-for-like vehicle whilst yours is repaired, subject to the terms and conditions of your insurance policy.
In the olden days you were left with no vehicle and would suffer significant personal losses, especially if you were a sole trader or didn’t have access to another vehicle. When making a claim you want your vehicle back as quickly as possible and be able to continue your occupation with the least amount of hassle possible, but most importantly without any financial shocks or unexpected bills.
We can all agree that insurance can be complicated enough without throwing further spanners into the claims process. Any fault accident or 50/50 claim will result in you being liable for the stated excess on the policy which could be a significant amount if you are trying to keep your premiums low. But, it is not just an insurance excess you could be liable for if you or your business has either had to register for VAT due to turnover or chosen to register.
Whatever your VAT status the fundamental principles of any insurance remain the same. Insurance indemnifies the insured for the financial loss they have sustained (less any excess) and not to leave the policyholder in a worse-off financial position following any claim. If you are fortunate enough not to have had an insurance claim and are VAT registered you may not have experienced the implications of insurance claims.
A few months ago I was having a conversation about insurance claims with industry expert Tim Kelly, founder of motorclaimguru.co.uk, who discussed how insurance companies were paying out claims net of VAT to businesses or individuals who were VAT registered.
On the face of it at first it didn’t seem that insurers were doing anything wrong and were just applying the rules set down by HMRC. However, it did raise three questions. Firstly, if VAT registered businesses or individuals are only covered for around 80 per cent of any claim (the full claim less the VAT element and excess) do they get discounts on their insurance policies? Secondly, how many policyholders understand that they will be liable for the VAT element of insurance claims. And finally, what would the financial implications be for the passenger transport industry?
According to HMRC there are 2,130,657 VAT registered companies or individuals on the register as of March 2016. HMRC makes the rules on VAT and who is responsible for payment or the recovery of VAT, stating: ‘It’s important to establish who is receiving supplies made in connection with or in settlement of insurance claims because this will determine who could have the right to recover VAT.’
‘Where the insured party is able to recover the VAT charged in respect of such supplies from HMRC the insurer will normally be responsible for paying only the net amount due under the insurance claim.’
However, following an investigation by LicensedTransportUncovered.com it was found that the question posed by insurers or their agents was: ‘Are you VAT registered?” Answering yes to this question meant that insurers or their agents then pay any claim net of VAT, because insurance companies are not VAT registered and therefore cannot recover the 20 per cent of VAT – applicable to certain parts of insurance claims.
This on its own could have serious financial implications for the taxi, private hire or chauffeur industry because in the case you are VAT registered you will not only have to find your pre-agreed excess of say £300 to £500, but you could also have to find a further £1,000 plus for the VAT element of the claim. For example, on a £6,000 car or van insurance claim a policyholder who is VAT registered could have to find an extra £1,500 to pay the insurer the VAT element (£1,000) and excess (£500) on the claim.
What insurers state
Having contacted ten insurance companies we only received two replies by the time we went to press. UK insurer, RSA, which provides a wide range of policies to UK businesses, including the chauffeur industry provided the following statement: “We indemnify the policyholder’s loss. If he/ she is able to recover VAT then the loss is the ex VAT cost. We would then deduct an excess unless the policyholder was not at fault and we could recover fully from the third party.
“If there is a split liability, we would still pay the full amount (less VAT and Excess) to the policyholder. If the loss is on a personal policy and he/she is unable to recover the VAT then we would pay the gross amount.”
AXA Insurance, provided the following statement: “If a customer is VAT registered (or partially registered), they can recover VAT from HMRC in the normal way.
“So, an example here is an invoice for repair of £1000 plus VAT (where the excess on the policy is £200). In this case, we pay £800 (and the customer pays the repairer the £200 excess, plus the VAT – another £200).
“They would then file their invoice with HMRC in the usual way for a business expense and receive the £200 VAT back. If we paid the VAT element, which they can recover, they would be over indemnified.
“If they are not VAT registered, we pay the invoice in full less the policy excess i.e. £1200 – £200 excess = £1000.”
The VAT scheme that nobody has heard of in the insurance industry….
However, there is a little known VAT scheme by HMRC that even industry experts and leading companies within the claim process have never come across or heard of before. When you consider there are 417,261 businesses or individuals using this scheme, according to HMRC, it’s a significant proportion of the 2,130,657 on the register who are on a ‘flat-rate’ scheme.
The ‘flat-rate’ scheme was designed by HMRC to help small businesses simplify records of sales and purchases by allowing them to apply a fixed flat-rate percentage on their gross turnover to arrive at the VAT due. This scheme is only available to those with a turnover of no more than £150,000, exclusive of VAT, and you will cease to be eligible to use the scheme if the total value of your income for the year ending is more than £230,000.
This scheme is not for every business and you should always seek independent advice, but the flat-rate scheme helps businesses cut through the red-tape of VAT returns. The system is simple to use and if it is the best option for your business VAT returns can be completed within minutes without the need of an accountant or hours collecting the data from all your receipts and invoices.
The flat-rate differs depending on the sector you operate in, with rates between 4 to 14.5 per cent. For example, the rate for a “taxi” company is 10 per cent of its turnover. This means that if you have a turnover of £100,000 (net of VAT), you will pay over a twelve month period £10,000 to HMRC to cover your VAT liability, keeping the other 10 per cent.
Being on this scheme means you cannot claim back day-to-day VAT on receipts, but you are still able to claim VAT back on certain capital expenditure over £2,000. Therefore, if applicable you could purchase a £24,000 vehicle, subject to no personal use, and claim back the £4,000 VAT element of the purchase price. Over a 12 month period using the previous example of £100,000 turnover you would pay £6,000 in total to HMRC in VAT, keeping £14,000.
So, if you are one of the 420,000 on the flat-rate scheme your insurance company cannot make you pay the VAT element of an insurance claim. But the problem is policyholders are not being asked if they can claim VAT back, they are taking the approach that all VAT registered businesses or individuals can claim the VAT back.
This clearly is not the case for a significant amount of policyholders.
The test case – Windscreen claim
A private hire vehicle was driving on the motorway when an object from the other carriageway hit the windscreen causing the screen to crack. Due to the fact the crack was several inches long the screen couldn’t be repaired and had to be replaced.
The vehicle which had a heated front screen, rain sensor and a City Safe sensor which applies the break in an emergency situation meant any replacement windscreen would be more expensive as the screen isn’t standard. The screen was replaced using the window insurance policy which was taken out with the car insurance through RSA. The policy had an £85.00 excess which would be payable to the company that replaced the windscreen.
The policyholder was asked if they were VAT registered. Answering yes, but stressing that they were unable to claim the VAT back, they were forced to pay a further £111.00, taking the total cost to just under £200.
The debate on whether they should pay the VAT element continued, but the policyholder was told that the insurance company’s agent wouldn’t back down and failed to take into account the implications this would have on the policyholder.
We contacted RSA on behalf of the policyholder and put to them that they were incorrectly charged VAT on an insurance claim.
In a statement RSA, said: “We have now looked into this case. Our handlers are instructed to ask whether a customer is VAT registered. If they are, then they are liable to pay the VAT element of any repairs in addition to the policy excess.
This is because under normal circumstances, the customer can reclaim their tax from HMRC. As only the customer is aware of their VAT registered status, we must rely on them to confirm if there are any special conditions that would apply.
“On this occasion, we understand that the customer is part of a special scheme called the “Flat Rate Scheme for Small Businesses.” Consequently, the customer cannot claim tax back on any goods or services they receive.
The spokesperson continued: “Because of the length of time that has passed since we replaced the glass, we are unable to clarify what was discussed between the customer and the repairer.
“This policy has an £85 policy excess with regard to glass replacement claims and this must be deducted in any event. However, we are happy to confirm that we have refunded the £111.98 VAT that the customer paid to Motorscreen. The customer will receive our cheque for this amount within the next five to ten working days.”
Motorscreen were approached for a comment, but failed to reply prior to publication.
Now I appreciate that in this case we are not talking about a significant amount of money, but it is the principle that this money should never have been paid. This case cannot be a one-off because of the lack of understanding of the scheme and that the agents acting for insurers implement a policy that VAT registered, means VAT can be fully recovered.
In respect to policyholders on the flat-rate of VAT, a spokesperson for AXA, said: “If policyholders are flat rated and can’t recover then we wouldn’t deduct anything.
“There are some circumstances when policyholders can reclaim VAT on the flat rated schemes for capital purchases. If they are partially rated we only deduct the percentage they can recover.
“The basic principle is one of indemnity so policyholders shouldn’t be better or worse off. We just need to make sure we pay them customer what they are entitled to and ensure they are not out of pocket but deduct any amount that they could potentially receive twice.”
Avoiding large VAT bills on insurance claims.
But what happens if the claim is substantial and runs into tens or hundreds of thousands of pounds? This could result in serious financial implications for a VAT registered policyholder with a tight cash flow. Obviously car repair claims won’t run into hundreds of thousands of pounds, unless you’re driving a Rolls Royce, but what happens if your premises catch fire or suffer significant damage due to a flood?
You could be left in a position where you have to find a significant sum of money to pay the insurer or their agent the VAT. Imagine if that figure was £10,000. This could cripple a small business and lead to serious financial implications on their cash flow, especially if a VAT return was only recently filed resulting a potential wait for a refund of up to six months.
In respect to larger claims, AXA said: “There would not be a VAT bill before any work commences. In practice, on the larger repairs we would make a series of interim payments, net of VAT where the policyholder was VAT registered, either to the policyholder or, more usually, the contractor.”
This will help policyholders spread the cost of the VAT due, potentially over a number of VAT returns. But again this could still affect cash-flow in small businesses. This is where another little known rule can be applied.
AXA then went on to raise the difference in the type of settlements available to policyholders, specifically cash settlements. The spokesperson said: “It’s a bit different when the customer elects not to have the damaged item repaired or replaced and instead opts for a cash settlement. In this case, no VAT is going to be incurred, (as no service will have been performed on their behalf), so VAT would not feature.”
Policyholders believe in the vast majority of cases that claims have to be made with their insurer and then rely on them to then conduct the repairs on your behalf. But you don’t have to do this and can instead opt for a cash settlement.
I would encourage policyholders to consider all options when making a claim to ensure that the claim is paid in a way that best suits their business financially and takes into account any VAT liability. If you are on the flat-rate VAT scheme you cannot reclaim the VAT, no matter what an insurer or their agent tells you. At the point of the claim ensure you inform all concerned that you are VAT registered, but on the flat-rate scheme and shouldn’t pay the VAT element of the claim.