VAT on Insurance Excesses

[Gareth83]

We do work for insurance companies and we are vat registered.

Job total = £2000 + VAT
Customer's excess payable direct to us is £250.00

Do I

a) Charge insurer £2000 + £400 - £250 = £2150
Charge customer £200 + VAT

or

b) Charge insurer £2000 + £400 - £250 = £2150
Charge customer £250 NO VAT

Is there an actual difference in the long run?

 

[Mr D]

Will HMRC be happy that you did not charge the customer vat?

Will customer if he then tried to claim the vat back?

 

[Argentum Tax]

I would say the initial position is as follows:

Total charge for the work is £2,000 plus £400 VAT= £2,400
Charge Customer £208.33 plus £41.67 VAT = £250
Charge insurer £1,791.67 plus £358.33 VAT = £2,150

However insurance companies will often ask you to charge the whole of the VAT to customer if he/she/it is VAT registered and in that case it will be:

Charge customer £250 plus £400 VAT = £650 (Customer claims VAT back of £400)
Charge insurance £1,750 plus no VAT = £1,750

Hence VAT man gets his £400, customer suffers £250 excess.
Unless anyone else knows any different?

 

[Frank the Insurance guy]

Hi @Gareth83 - You have to charge VAT to someone, but who you invoice depends on whether the Customer is VAT registered (Insurers should be able to confirm this)

1. If the customer is VAT registered - you need to invoice them the excess £250 + the whole VAT amount and issue a VAT Invoice

2. If the customer is not VAT registered - you need to invoice the customer only the excess £250. The rest, including full VAT is invoiced to the Insurer.

 

[UK Contractor Accountant]

2. If the customer is not VAT registered - you need to invoice the customer only the excess £250. The rest, including full VAT is invoiced to the Insurer.

This

 

[Spur Support Services]

This depends if the Insured Party is VAT registered in a taxable business and what your agreement is with the Insurer.
You state that your arrangement with the insurer is that you collect the excess from the insured party.
All costs are expenses suffered by the Insured Party. The insured party is the VAT customer.

Therefore if the insured party is VAT registered.

Invoice 1, Line 1 - VAT invoice to customer for full fee (£2,000 + £400 VAT using a 20% VAT code)
Invoice 1, Line 2 - Credit on the invoice to customer showing the amount recovered from the Insurer (£1750 using an exempt VAT code so that the credit isn't included on the VAT MTD return)

Invoice 2 - "Invoice" to Insurer for £1,750 using an exempt VAT code (so that the income isn't double counted but the value shows on your sales ledger). Ensure you attach a pdf of the original customer invoice to your claim.

This leaves the Insured Party paying £650 of which they can claim back £400 from HMRC and the Insurer settling £1,750.
Ensure you use the claim number that the insurers give you as an additional reference on both documents, to aid debt collection from the insurer for their balance and so you can run reports on it at a later date.

If the insured party is not VAT registered and the insurer expects you to collect the excess:
Invoice 1 - VAT invoice to insured party for the VAT inclusive excess of £250. (£208.33 +VAT at 20%)
Invoice 2 - VAT invoice to Insurance Company referring to the Customer Name for VAT inclusive balance of £2150 (£1,791.67 plus 20% VAT)
This leaves the Insured Party paying £250 and the Insurer settling £2,150.
Ensure you use the claim number that the insurers give you as an additional reference on both documents, to aid debt collection from the insurer for their balance and so you can run reports on it at a later date.

NB Exempt VAT coding is different from Zero VAT coding.

 

[UK Contractor Accountant]

If the insured party is not VAT registered and the insurer expects you to collect the excess:
Invoice 1 - VAT invoice to insured party for the VAT inclusive excess of £250. (£208.33 +VAT at 20%)

no - insurance company pays the vat! there is no vat on the excess.

If the customer is not VAT-registered, then the Insurer will fund the VAT. The customer will pay the excess, but no VAT. The Client will invoice the customer for the excess only. Les is you main man for this.

@lesvatadvice

 

[Spur Support Services]

no - insurance company pays the vat! there is no vat on the excess.

If the customer is not VAT-registered, then the Insurer will fund the VAT. The customer will pay the excess, but no VAT. The Client will invoice the customer for the excess only. Les is you main man for this.

@lesvatadvice

The insured party can't reclaim the VAT if they aren't VAT registered, so I gave a practical invoice solutions for the service provider.

Insurance Premiums are exempt. The "insurance excess" is not an insurance premium.
I am certain that Les will agree.

The excess is just a term used within the insurance agreement indicating how much of the costs, that are suffered by the insured party and covered by the insurance contract, the insured party agrees to settle should an insured event occur, with the insurance company agreeing to settle the balance.

The rest of the conversation then becomes one of how best to reflect that in the books and records of the entities involved to support correct VAT compliance, an effective audit trail and ease of debt collection with both the insurer and the service provider.

NB Insurance companies records are likely to be arranged on a claim basis, rather than a service provider basis so having a link to a claim is highly important as their records may not support running a creditor report on all invoices due to a particular service provider.
To them the service providers are not providing the insurance company with services, they are providing proof of the costs of fulfilling the insurance contract.
This means that being able to print a statement for the insurer that shows the claim number is very important for business who deal with insurance companies.

 

[UK Contractor Accountant]

I am certain that Les will agree.

don't think so!- see his post in the link below from sister site AWeb

https://www.accountingweb.co.uk/any-answers/vat-on-insurance-excess-contribution

 

[Spur Support Services]

don't think so!- see his post in the link below from sister site AWeb

https://www.accountingweb.co.uk/any-answers/vat-on-insurance-excess-contribution

Les doesn't say the excess is exempt. He is only explaining what payments will be made.

If the insurance company was collecting the excess, then it would be a simple case of invoicing the insurance company for the full £2000 plus VAT and leaving it to them to sort out. This complexity is due to the insurance company (and the insured party) asking the service provider to perform a more complex debt collection exercise.

The overall position has to be a payment to HMRC of 20% on the cost of the service provider performing the work (£2,000 @20% = £400).

You could argue that technically you could perform the same process that I applied to the the VAT Registered Entity to the Non VAT Registered Insured Party (as follows), but I was trying to give what I felt like the simplest solution for the service provider.

So the alternative for the Non VAT Registered insured party would be:

Invoice 1, Line 1 - VAT invoice to Insurance Company for full fee (£2,000 + £400 VAT using a 20% VAT code) including naming the Insured Party as the beneficiary of the service
Invoice 1, Line 2 - Credit on the invoice to insurance company showing the EXCESS recovered from the Insured Party (£250 using an exempt VAT code so that the credit isn't included on the VAT MTD return)

Invoice 2 - "Invoice" to Insured Party for £250 using an exempt VAT code (so that the income isn't double counted but the value shows on your sales ledger).

This comes out with the same result and has the added benefit that you are proving that you are only expecting the insurance company net of excess but seems slower for the service provider to process. It's all a matter of personal taste.

Les' initial point on the VAT registered client only paying the excess plus VAT, is correct, but my response in this thread takes into account that most accounting systems cannot produce a "VAT only" invoice, on the basis that if there is no taxable supply then there is not VAT.
The solution I have given shows the right taxable supplies, and endeavours to ensure that the "debt collection" reallocations between the insurer and the insured are ignored within the MTD VAT Return.

NB Exempt is not the same as zero rated.

 

[UK Contractor Accountant]

that most accounting systems cannot produce a "VAT only" invoice,

which systems are those?

Sage 50 Accounts & Sage50 Cloud does
FreeAgent does
Quickbooks does

I assume Xero doesn't?

 

[UK Contractor Accountant]

or
b) Charge insurer £2000 + £400 - £250 = £2150
Charge customer £250 NO VAT

Just to clarify for the OP your option b is how it should be done for non vat registered customers as pointed out by Frank the insurance guy above.

 

[UK Contractor Accountant]

Xero workaround - unless its changed!

Otherwise, in a new Bill you can enter in just the VAT amount - coded to the VAT account (820), with the tax rate as VAT on Imports.