Is there VAT on insurance?

No. Insurance and reinsurance are exempt from VAT under Group 2 of Schedule 9 to the Value Added Tax Act 1994, so a premium carries no VAT and there is no input tax to reclaim. The figure people mistake for VAT on an insurance document is Insurance Premium Tax, which is a separate tax charged on the premium itself at 12 per cent, or 20 per cent on certain policies. It is not VAT, it is not shown as VAT, and it cannot be recovered on a VAT return however the business is registered.

Is there VAT on business insurance?

No, and this catches people out because business insurance feels like an ordinary business cost. Employers' liability, public liability, professional indemnity, fleet, commercial property and cyber cover are all exempt supplies of insurance. The premium carries Insurance Premium Tax rather than VAT. Nothing goes in box 4 of the return. The net amount, including the Insurance Premium Tax, belongs in the purchases total in box 7, because an exempt purchase is still consideration for a supply.

Is there VAT on car insurance?

No. Motor insurance is exempt from VAT like any other insurance. Ordinary motor policies carry Insurance Premium Tax at the standard rate of 12 per cent. The higher rate of 20 per cent applies to some vehicle insurance, specifically cover sold through a vehicle dealer or supplier alongside the car, which is why a policy arranged at the dealership can show a different tax figure from the same cover bought direct. Either way none of it is VAT and none of it is recoverable.

What are the Insurance Premium Tax rates?

There are two. The standard rate is 12 per cent, in force since 1 June 2017, and it applies to most general insurance including motor, property, liability and pet cover. The higher rate is 20 per cent, unchanged since 4 January 2011, and it applies to travel insurance, insurance on mechanical or electrical appliances, and some vehicle insurance. Life insurance, permanent health insurance, reinsurance and certain commercial marine, aviation and goods in transit cover are outside Insurance Premium Tax altogether.

Do I charge VAT when I recharge insurance to a tenant or customer?

Usually yes, and this is the commonest and most expensive error in the area. HMRC's guidance at VATINS2620 looks at who the policy actually covers. Where a landlord insures their own building and passes the cost to a tenant, the policy names the landlord, the tenant cannot claim under it, and the lease obliges the landlord to insure. The recharge is therefore part of the cost of providing the accommodation, and it follows the liability of the main supply. If the property has been opted to tax, the insurance recharge carries VAT at 20 per cent even though the premium itself carried none.

Is an insurance payout subject to VAT?

No. A claim settlement is compensation for a loss rather than consideration for a supply, so it is outside the scope of VAT entirely and does not belong in the sales figures on the return. That is different from an exempt supply, which does belong in the totals. Where the insurer settles by paying for repairs and the business is VAT registered, the insurer will normally pay the net cost and leave the business to reclaim the VAT on the repair invoice in the ordinary way, so the input tax claim sits with the business rather than the insurer.

VAT on Insurance: Why There Is None, and When a Recharge Changes That

Insurance is exempt from VAT — Schedule 9, Group 2 of the VAT Act 1994. There is no input tax to reclaim, ever. The figure on the document that looks like VAT is Insurance Premium Tax: 12% standard, 20% higher. IPT is not VAT, never goes in box 4, and is simply part of what the cover costs. But if you recharge insurance to a tenant or a customer, that recharge usually follows your own supply — and on an opted property it carries VAT at 20%.

Recharging insurance to a tenant? Send me one invoice and I will tell you whether the VAT is right. Just the lease position, whether the property is opted to tax, and how the recharge is shown. This is the single most under-declared item I see on property VAT returns, and the assessment goes back four years. Free, back to you within one working day, and nothing follows unless you ask for it. Send me the details.

Why the premium carries no VAT

Group 2 of Schedule 9 to the Value Added Tax Act 1994 exempts the provision of insurance and reinsurance, together with the services of an insurance intermediary acting as such. An exempt supply sits outside the charge to VAT altogether, so no VAT appears on the document and there is nothing to recover.

That covers everything a business is likely to buy: employers' liability, public liability, professional indemnity, commercial property, fleet, cyber, key person, credit insurance. All of it exempt. A posting that recovers VAT on an insurance premium is recovering tax nobody charged.

The number that looks like VAT, and is not

Insurance Premium Tax is a separate tax on the premium itself. It is charged by the insurer, it appears on the schedule, and it is frequently keyed into a bookkeeping system as though it were VAT.

Rate	Applies to	In force since
12% standard	Most general insurance — motor, property, liability, pet	1 June 2017
20% higher	Travel insurance, mechanical or electrical appliance insurance, and some vehicle insurance	4 January 2011
No IPT	Life assurance, permanent health, reinsurance, and certain commercial marine, aviation and goods in transit cover	—

Rates are from HMRC's Insurance Premium Tax rates.

Two reasons the 20% rate confuses people. It is the same number as the standard rate of VAT, so an IPT line at 20% on a travel policy reads exactly like VAT to anyone keying it in. And because the higher rate catches insurance sold alongside the thing insured, the identical motor cover can carry 12% bought direct and 20% arranged at the dealership. Neither figure is recoverable.

How to post it

The whole premium, IPT included, is the cost. IPT is not a separate recoverable tax and does not belong in a VAT control account. Post the gross figure to insurance.
Exempt is not outside the scope. The amount belongs in the purchases total in box 7, for the same reason bank charges do — it is consideration for a supply. Use the exempt code, not the outside-the-scope one. The mapping is set out for Xero and for Sage.
Watch the broker's fee. An intermediary acting as such is within the exemption, but a separate fee for advice, risk management or claims handling sold outside that role can be standard-rated. One statement, two treatments.

Posting exempt insurance as outside the scope changes no VAT at all, which is why nobody catches it. It understates box 7 every quarter, and for a partly exempt business it corrupts the partial exemption calculation that decides how much input tax is recoverable everywhere else.

The recharge, which is where the money is

This is the part that costs real money, and it is almost always wrong in the same direction.

A landlord insures a commercial building and passes the premium on to the tenant, showing it as insurance and treating it as exempt because the premium was exempt. HMRC's guidance at VATINS2620 takes that apart. The test is not what the cost was when you bought it. The test is whose risk the policy covers.

The policy names the landlord as the insured.
The tenant cannot claim against the insurer under it.
The lease obliges the landlord to insure the building.
The tenant's own risks are not covered by it.

So the cover is the landlord's own, bought for the landlord's own purposes, and the recharge is part of the cost of providing the accommodation. In HMRC's words, the recharge follows the liability of the main supply. Nor can the landlord fall back on the intermediary exemption: arranging insurance means arranging it for someone else, and a landlord who is the only insured party is not doing that.

If the property is opted to tax, the insurance recharge is standard-rated. The letting carries VAT at 20%, the recharge follows it, and VAT at 20% is due on the whole recharged amount — including the IPT inside it. Treat it as exempt and you have under-declared output tax every quarter since the lease began. Four years is the usual assessment window, and it is the tenant, not the landlord, who ends up with the recoverable input tax once it is put right.

The same logic reaches well beyond property. A haulier insuring goods in transit and adding "insurance" to the invoice, an equipment hire business insuring its own plant, a salon recharging treatment cover — if the policy is yours and the charge sits inside a supply you make, the recharge takes the rate of that supply.

A worked example

A landlord owns a single commercial unit. The property has been opted to tax. Buildings insurance for the year:

Premium £2,000, plus IPT at 12% of £240. The landlord pays the insurer £2,240.
No input tax on that £2,240 — insurance is exempt, and the £240 is IPT, not VAT.
The landlord recharges the full £2,240 to the tenant under the lease.
The property is opted, so the recharge follows the letting and is standard-rated: £2,240 + VAT of £448 = £2,688.

Treated as exempt instead, that is £448 of output tax under-declared a year, or £1,792 over four years on one unit. Multiply by a small portfolio and it stops being a rounding error. The tenant, if fully taxable, recovers the £448 anyway — so the cost of getting it wrong falls entirely on the landlord, for no benefit to anyone.

Claim receipts

A settlement from an insurer is compensation for a loss, not consideration for a supply, so it is outside the scope of VAT and does not belong in the sales figures. Coding a claim receipt as zero-rated income inflates box 6 for no reason.

Where the insurer settles a repair, the usual arrangement is that a VAT-registered business is paid the net cost and reclaims the VAT on the repairer's invoice itself. So the input tax sits with the business. If an insurer has paid you the gross figure, check why before you claim the VAT as well.

Rates and references above are from HMRC's published guidance, linked in full. This page is a general reference and not advice on a particular business — if your own position does not match what is set out here, that is exactly the sort of thing worth sending over.