As the flood waters recede, it is important that those affected take advice on the tax implications of any damage that their property may have incurred. VAT and direct tax issues will need to be considered.

Possible direct tax implications

  • To the extent that there has been an insurance receipt then one needs to consider whether there are any CGT implications. The rules are not always straightforward and very much depend on how the insurance proceeds are used. For example, if the insurance monies are used to restore the asset then this should not lead to a CGT disposal. If only part of it is used for this purpose, there may be a partial CGT disposal and advice should be sought on methods of mitigating any liability. The position can be complicated where insurance proceeds are received for damage to plant and machinery, where there is usually an interaction with the capital allowances regime.
  • Where insurance proceeds are received to compensate for the loss of profits or stock, they are likely to be taxable receipts of the business.
  • Insurance proceeds that cover the cost of repairs, redecoration or similar will again be taxable to the extent that the underlying work would have been tax deductible. In essence, there is a netting-off of the receipt and expenditure.

Possible VAT implications

  • Where a business is fully taxable and the flood damage is to assets or stock, the VAT charged on the cost of any remedial work or the replacement of assets and stock can be recovered under normal rules. In such cases, the insurance company will generally pay only the net amount of the costs incurred.
  • If a business is fully or partially exempt, or the damage has been done to assets with which you only make exempt supplies – a rental cottage for instance – then you should inform the insurance company that you will not be able to recover the full VAT on the costs. This is to ensure that your business does not suffer any further as a result of the flood and that the insurance company pays to you the full cost of any remedial work or replacement of assets.
  • Any compensation paid for loss of income will be outside the scope of VAT.
  • If you are a private individual or the damage is to assets not used in the business, then VAT will not be reclaimable. You should again ensure that the insurance company pays the gross amount of any costs, including VAT, less any excess.

Finally, there may be accounting issues to consider. Under UK GAAP, receipts will generally be included in the same period in which the loss/expense was incurred. It may be, however, that the actual cash is not received until some time after the tax is due, which could lead to cash flow problems. If this position is likely to arise then it is important to seek advice, since it may be possible to agree a payment plan with HMRC.

We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.