VAT is a complicated subject and therefore it is never possible to provide an answer that fits all scenarios. However, in respect of commercial insurance, the simplest answer is that if it is owned by a company which is VAT registered, it is not necessary to include this within the sum insured. In the event of a claim, VAT on the rebuilding costs could be reclaimed in the usual way.
VAT is generally charged on all building work. The main exception to this is in respect of a new build (but not repairs) to a residential property.
As we said, this is never a straightforward situation so you also need to consider the following when calculating your sum insured:
- Many commercial insurance properties are not owned by the company, but by the director in a personal capacity, pension fund or trustees. If the actual owner of the building is not VAT registered, VAT must be added to the buildings sum insured.
- Property owners – again a simple rule is that if VAT is charged on the rents, then VAT can be reclaimed on the rebuilding cost and it is not necessary to add this to the sum insured. If VAT is not charged on rents, then VAT needs to be added to the buildings sum insured. As highlighted, this is a simple rule and we would always suggest that you initially check with your accountant to ensure that any VAT is recoverable before deciding not to add it to the sum insured.
- Mixed residential and commercial – an example would be a block of flats with retail shops on the ground floor. In respect of a rebuild, the flats would be free of VAT but the commercial section would not. It also needs to be considered that the initial costs, such as architects’ fees, demolition and landscaping, would all be subject to VAT and the sum insured needs to allow for this.
- Charities have separate VAT rules and they should obtain independent advice on this.
- If you do need to include VAT within the sum insured, when the VAT rate was increased from 17.5% to 20% you should have increased the sum insured by the additional 2.5%. Index-linking of the sum insured would not have included this. We would therefore suggest that this is increased now if it has not already been done.
As highlighted above, we can only provide some general comments regarding VAT and we would always recommend that you obtain professional advice from your accountant before making a decision not to include VAT within the sum insured.