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Don’t fall into the VAT trap

Peter Morse draws Flat Living readers’ attention to an often overlooked tax issue which could impact on your buildings insurance

Did you know that the recent rise in VAT to 20% could have an impact on your rebuilding costs, should you need to make a claim against your buildings insurance policy? When was the last time you undertook an insurance reinstatement cost assessment (valuation) on your property? Recent figures from a leading provider of insurance valuations found a staggering 88% of all buildings surveyed by them in 2007-2010 were underinsured to some degree (source: BCH). This is now more pertinent as the increase in VAT has also increased the costs of rebuilding, including demolition and the professional fees associated with it. Of course if you are VAT registered, the recent increase is not an issue if you have elected for your building to be VAT registered. The tax does not need to be added to the insurance value stated in the policy. The value within a policy should reflect the cost of full rebuilding,

including an allowance for fees and demolition, and upgrading to current building regulations. Obviously it should also allow for VAT if the tax applies to the person or organisation having the financial interest in that building. Some buildings are classed as zero- rated as far as the current VAT rules are concerned. By far the most significant sector to which this applies is the construction of new dwellings, including their outbuildings built at the same time. The VAT ruling ( Notice 708) allows for the


rebuilding of a structure used for domestic purposes to be zero-rated even where is possible for a flank wall, foundations and the floor slab to be salvaged and incorporated in the new structure.

The dilemma for the policy holder is this: when a loss is substantial, but partial, VAT will apply to the cost of repair. So should the policyholder add the tax, as most losses are partial not full? One view is that when accepting a value for the sum insured in a policy, the insurer assumes that the entire risk is to be included. If in the event of total loss VAT is not applicable, then it should not be included in the insurance valuation.

At Clear Insurance Management, we believe that there are still grey

areas in spite of this interpretation and customers may wish to err on the side of caution and to add VAT if they are not registered. All stakeholders would wish to avoid any sanction for under insurance – such as average - in the event of a claim.

Peter Morse is Executive Director of Clear Insurance Management Limited. Tel: 0208 329 4900

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