Last updated: 14 October 2026
Is VAT charged on an insurance compensation payment?
No. Insurance payouts and compensation for loss or damage are outside the scope of VAT, because they aren’t payment for any goods or services you supply. You don’t charge VAT on them or include them in your VAT return. But if you’re VAT-registered and buy replacement goods or repairs, you can usually reclaim the VAT on those costs as normal. Insurers often deduct the VAT from your payout for that reason.
How insurance claims work for VAT-registered businesses
| Step | VAT position |
| Insurer pays compensation | Outside the scope; no VAT |
| You buy replacement goods or repairs | Reclaim the VAT if used for taxable business |
| Insurer pays the repairer directly | You can still reclaim the VAT if the invoice is addressed to you and the repair is for your business |
| Insurer pays the net amount, excluding VAT | Normal for VAT-registered businesses |
| Insurance excess you pay | No VAT on the excess itself; VAT may be on the repair invoice |
Not VAT-registered?
If you aren’t VAT-registered, you can’t reclaim VAT on repairs, so the insurer normally pays the VAT-inclusive cost. Tell your insurer your VAT status when you claim.
When compensation can be taxable
Some payments called “compensation” are actually payment for a supply, and VAT applies:
- payments to cancel a contract early, where you give up rights under it (often treated as further payment for the supply)
- dilapidation payments that are really part of rent (normally outside the scope, but check)
- payments for agreeing to do something, such as not competing
HMRC has changed its view on early termination fees over time, so get advice on these.
Example
A shop’s window is damaged in a storm. The glazier’s invoice is £1,500 plus £300 VAT. The insurer pays £1,250 (the net cost minus the £250 excess). The shop pays the glazier £1,800 and reclaims the £300 VAT on its next return. The £1,250 payout isn’t on the VAT return.
Insurance premiums
Insurance premiums are exempt from VAT, but most are subject to Insurance Premium Tax (IPT), currently 12% for standard insurance. You can’t reclaim IPT.
Income tax and corporation tax
Compensation for lost stock or repairs is taxable business income, offset by the cost of repairs. Compensation for a capital asset may be a capital receipt with capital gains or capital allowances effects.
Records to keep for a claim
Keep the insurer’s settlement letter, the repair or replacement invoices, and photos of the damage. The settlement letter shows how the payout was calculated and whether VAT was excluded. If the insurer paid you the VAT-inclusive amount, tell them, because the policy terms usually mean the VAT element should not be paid to a business that can reclaim it. HMRC may ask for these documents if your VAT return shows a large input tax claim for repairs.
Frequently asked questions
Does a business interruption payout have VAT?
No, it’s outside the scope.
Should I tell my insurer I’m VAT-registered?
Yes, so they pay the right amount.
Can I reclaim VAT if the repair was for a private car?
No, unless it’s used wholly for business.
Is my excess a VAT-able payment?
No.
Related: VAT on cashback and rebates and reclaiming VAT on assets.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with VAT on insurance claims. See our VAT accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
