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Volume 1, Issue 2, 2010
Table of Contents

Featured Article
By David Damsell
Featured Article
By Mark Vos and Rodney Gault
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Reducing VAT Costs on Insurance Claims

By David Damsell

Head of Corporate & Major Incident Team, Crawford & Company (UK)

Historically, Value Added Tax (VAT) has been an often-neglected tax. However, with the standard rate of VAT rising to 20 percent beginning January 4, 2011 - its highest-ever level in the U.K. - VAT has never been more in the forefront of people’s minds. Furthermore, in these fiscally turbulent times, increasing VAT efficiency and reducing VAT costs are significant drivers for all types of business. 

VAT is particularly important in the insurance industry for two reasons. First, VAT on expenditure is generally a cost to the insurance business. Second, irrecoverable VAT is commonly part of the cost of an insurance claim. VAT has a direct impact on the overall cost of the business and, therefore, directly impacts its efficiency and profitability.

Loss adjusters need to understand the rules around VAT, which are many and often complex, to ensure that both policyholders and insurers gain the full relief available to them. More complex cases may need the involvement of VAT consultants. Since the greatest savings can be achieved with property claims, those will be the focus on this article.

VAT rate change

The first area for saving concerns the rate change itself. As the last VAT rate increase only occurred in January 2010, most businesses will be aware of the simple measures available to ensure that VAT charged will be at the lower pre-rise rate (which include ensuring that invoicing occurs before the rate rise or, for services spanning the rate change, asking the supplier to account for VAT at the old rate on services provided prior to the rate change). There are, however, restrictive anti-forestalling provisions within the VAT regulations that prevent any abusive pre-payment arrangements, i.e., invoicing for works not yet undertaken or completed. 

Rebuilds of domestic property

It is generally well known that, when a domestic building is demolished to ground level and rebuilt, the rebuild costs should be VAT-free (zero-rated in VAT parlance). However, an insurance claim often is filed for only partial damage to a property, and a total rebuild is not necessary. In such situations, VAT typically will apply to the repair costs. As that VAT is unlikely to be recoverable, the costs of such a claim will rise. With the increase in VAT,  debate around the economics of repairing or rebuilding will likely become more common. 

However, this decision is further complicated by an often-forgotten rule that can allow an existing building to be treated as if it had been completely demolished, even when it has not. In essence, when the only part of a building that remains is one façade (or a double façade on a corner site) and the retention of that façade is a condition or requirement of planning consent, then that building is treated as if it has ceased to exist. Using this rule, it is possible to avoid incurring VAT on all of the rebuild costs (which can be significant). This rule is particularly useful when the insured risk is a listed residential building, for which rebuild costs generally are higher and planning consent more likely to require retention of an existing façade.

What often is overlooked is that liability for accounting for VAT rests with the supplier of the services (normally the building contractor), who can incur penalties if the wrong level of VAT is assessed. In view of this, and somewhat understandably, contractors often will err on the side of caution and charge VAT. It is essential that insurers and/or their appointed loss adjusters are aware of the possibilities for obtaining VAT relief. While it is important to appreciate the position of the supplier, any VAT charge should be challenged. These cases may require the intervention of a third-party VAT advisor to provide comfort to the supplier and ensure that the correct VAT rate is applied.

Listed domestic, relevant residential and charitable buildings

The U.K. VAT laws provide relief for the costs of alterations that are made to a listed residential (including "relevant residential" such as student accommodation or care homes) or charitable building (such as a church), provided the works are alterations and listed building consent is required and obtained for the works. In those cases, the works are zero-rated. Perhaps somewhat surprisingly, works to listed buildings that are connected to their repair and maintenance are subject to VAT. Where the works are to relevant residential and charitable buildings, additional certification requirements, which can cause issues, apply.  

Given that position, one initially might be led to expect VAT on the costs of any repair work to a listed property, following a fire, for example. However, as with most regulations, it is not that straightforward. It is possible for repairs to be treated as alterations (and therefore VAT-free), but also vice versa. The significant volume of case law in this area demonstrates the difficulties that can be encountered and this is one particular area where third-party VAT advice often is required.

While it is true that works to restore a building (following, for instance, flood or fire damage) would involve substantial repairs, it is possible that significant alteration works may also take place that are part of the insurance claim (for example, rebuilding internal partitions to a revised layout), which can result in significant savings. Where works to a listed building are being carried out, it is important to confirm whether any VAT saving can be achieved.

It should also be noted that when the insured risk is a listed place of worship, there is a scheme outside the normal VAT system that provides the opportunity for a property owner to obtain a refund of VAT on certain eligible aspects of completed repairs after the presentation of original invoices. As this is an additional refund scheme, there is the risk that it will be withdrawn as part of the U.K. government’s spending reductions. Until this occurs, though, obtaining a full refund of VAT on eligible works to listed places of worship is possible. It should also be noted that, in the case of this particular scheme, the contractor would charge and be paid the VAT, with the property owner recovering the VAT after payment of the invoices.

Other VAT reliefs

Other reliefs that can result in VAT savings include renovations to residential buildings that have been empty for two years, for which the reduced rate (at 5 percent) applies. With the influx of foreign ownership of residential buildings (particularly in London), coupled with the difficulties in the housing market, insurance claims involving empty buildings may arise. When such a claim forms part of a renovation, relief should be available.

VAT reliefs also are available to certain residential conversions and installations of various mobility aids. While these are unlikely to be common costs in insurance claims, it is important that the reliefs are understood to save the maximum amount possible.

Finally, as VAT can be revisited within four years, there is an opportunity to look again at past claims and establish whether savings could have been achieved. If so, it may be possible to obtain refunds after the fact by engaging with the contractors involved.

VAT incurred in insurance claims can be significant, especially for property-related expenditure.  It is important for both insurers and their appointed loss adjusters to ensure that maximum relief is obtained whenever possible. They also should not assume that the supplier has determined the correct VAT liability. Actual VAT savings can be achieved by understanding the relief available, using loss adjusters with significant VAT knowledge and, in complex scenarios, utilizing the knowledge of external VAT advisors.

David Damsell has 20 years of property loss adjusting experience and also has managed the coordination and delivery of loss adjusting services for construction and major loss units. Before joining Crawford, he spent six years with a consulting engineering practice and seven years with major construction companies. Contact him at