The warehouse was broken into, the insurer accepted the claim, and then roughly a fifth less than the expected amount arrived – and in the meantime the managing director had been asked to sign a “VAT declaration” without knowing exactly what it meant. This is a recurring question on accountants' forums, and as a broker I am asked it regularly: why net, when gross, and what should we sign? The answer is not the insurer's arbitrary choice but the point where the Insurance Act meets the logic of indemnity – and once you understand it, you can fill in the declaration with more confidence.
- Under Section 123 of the Insurance Act (Bit.) – as quoted in insurers' claims settlement information – the insurer may pay the VAT component of its benefit only against an invoice that includes VAT, and only if the person entitled does not recover the VAT from the state budget.
- If the company can deduct the VAT on the repair, that VAT is not its loss, so the insurer pays the net amount; a company under the small-business VAT exemption, or one whose activity does not entitle it to deduct VAT, receives the gross amount – which is why the insurer asks for a separate VAT declaration during claims settlement.
- Under the Accounting Act, the claim payment is other income, while the repair cost or the derecognised asset is an expense – the two must not be netted off, and the claim payment itself is not a transaction subject to VAT: the insurer issues no invoice for it.
Why net? The logic of loss
The insurer indemnifies loss, that is, the reduction that has actually occurred in your assets. For a company entitled to reclaim VAT, the VAT on the repair invoice is not a final expense: the company deducts it in its VAT return and gets it back from the state budget. If the insurer paid this as well, the company would be better off after the loss than before it – which the law calls the prohibition on profiting from a loss. Section 123 of Act LXXXVIII of 2014 on the Business of Insurance (the Insurance Act, Bit.) lays down this logic: the insurer may pay the VAT component of its benefit only against an invoice that includes VAT, and only if the person entitled does not recover the VAT from the state budget under the law – this is how Hungarian insurers' claims settlement information quotes it. From this follows the rule that SMEs learn the hard way: if you can deduct the VAT, you receive the net amount; if you cannot – a business under the small-business VAT exemption (alanyi adómentesség), or a company whose activity does not entitle it to deduct VAT, such as certain healthcare or education providers – you are entitled to the gross amount. For companies that are only partly entitled to deduct and apportion their input VAT, the situation is more complex, and this must also be indicated in the declaration. A separate case is the repair of a company passenger car: under Section 124(4) of the VAT Act (Áfa tv.), half of the VAT on services used to operate and maintain a passenger car cannot be deducted, so in such cases insurers typically pay half of the VAT to a company entitled to deduct VAT – this, too, must be indicated on the declaration.
The claims VAT declaration: what are you signing?
On the list of documents required for corporate property claims, insurers ask for a separate declaration on the right to reclaim VAT. One publicly available insurer claims guide puts it this way: the amount of compensation is determined with or without VAT, depending on whether the person entitled to compensation can reclaim, on the basis of its activity, the VAT shown on the VAT invoice submitted; if so, the settlement is made on the net amount, i.e. excluding VAT. The declaration is therefore not a waiver but a statement of fact – but, as a statement of fact, it falls under the duty of disclosure in the insurance contract. A VAT-registered business that declares itself “not entitled” in order to receive the gross amount is making an untrue statement, and the insurer may claim back the difference. A business that errs the other way – accepting the net amount while under the small-business exemption – leaves its own money with the insurer. The right answer lies with your accountant: fill in the declaration in consultation with them, especially if the company crossed the small-business exemption threshold in the year of the loss or carries on mixed activities. This is one of the typical points of cooperation between the accountant and the broker.
No invoice, in-house repair, theoretical value
The Bit. rule ties the payment of VAT to an invoice, so whether an invoice exists already sets a limit on the amount. If the company does not have the damage repaired, or restores it without an invoice, Hungarian claims practice typically pays the net restoration cost customary at the time of the loss, calculated without VAT – so in such cases even a VAT-exempt company does not receive the gross amount, because there is no VAT invoice of the kind the law requires. For restoration carried out by your own employees, documenting the material invoices and the labour costs is the starting point; on what basis the insurer accepts your own labour charge varies from one set of policy conditions to another. A separate question is a contract that pays at “theoretical restoration value”: in a home insurance case (Pfv.V.20.993/2020/6), the Kúria (Hungary's supreme court) held that where the insurer undertook to pay not the costs actually incurred but the theoretical restoration value, the invoice condition cannot be applied, and that where a policy condition is ambiguous, the gross interpretation, which is more favourable to the consumer, prevails. This structure is rarer in business contracts, but the lesson is the same: the claims settlement chapter of the policy conditions tells you whether actual or calculated cost is the basis of payment – it is worth reading this when you take out the policy, as I described in the article on reading policy conditions.
Accounting: where does the claim payment go?
Under Section 77 of the Accounting Act (Act C of 2000), income received in connection with a loss event – including any amount acknowledged and confirmed by the insurer by the date the balance sheet is prepared – is other income; under Section 81, payments related to the loss event are other expenses, and this is typically also where the derecognition of a destroyed asset (its extraordinary depreciation) goes, while the repair invoice is a cost when incurred (services used, materials) or, if the company acquires a new asset after the loss, capital expenditure. Income and expense must not be netted off: the insurer's transfer does not “cancel out” the repair invoice but stands against it as income. For corporate income tax, the income increases the tax base and the recognised expense reduces it. For VAT purposes, the claim payment is not consideration and falls outside the scope of VAT: the insurer does not issue an invoice, and the company does not issue an invoice to the insurer – the repair invoice, however, should be made out in the company's name, because only then can the VAT be deducted, and only then does it meet the invoice condition of the Bit. If the insurer pays the repair shop directly, the bookkeeping does not change: for the company, the full amount of the repair invoice is a cost and the part settled by the insurer is other income – your accountant settles the details in line with the company's accounting policy.
What should you do now?
In the event of a loss, ask for the repair invoice to be made out in the company's name, with its tax number and with the VAT shown. Fill in the VAT declaration in consultation with your accountant, according to your actual right of deduction, and put it in the claim file alongside the other documents – the list in the article on documenting a loss includes this item too. Read the claims settlement statement: does it show whether the calculation was made on a net or a gross basis, and does this match your declaration? If not, ask the insurer about it in writing. If the settlement statement is unclear or the case has stalled, I help where I can to interpret it on the basis of the policy and the settlement statement – on accounting and tax questions, your accountant is your partner.
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Sources
- Insurance Act (Bit.) – Act LXXXVIII of 2014 on the Business of Insurance, Section 123 (payment of the VAT component of the insurance benefit)
- Generali – Claims settlement information (the VAT rule under Bit. Section 123 and the invoice condition)
- Groupama – Corporate property insurance: documents required for claims settlement (declaration on VAT recovery)
- GMT Legal: Gross or net – when must the insurer reimburse the VAT component of restoration costs? (Kúria Pfv.V.20.993/2020/6)
- Számviteli Levelek (Accounting Letters): Accounting for amounts paid by an insurer (9 November 2023)
- Könyvelői Praktikum (Accountants' Practice): Accounting for loss events (Accounting Act (Szt.) Sections 77 and 81, VAT, corporate income tax)
- Accounting Act (Szt.) – Act C of 2000 on Accounting, Sections 77 and 81
- VAT Act (Áfa tv.) – Act CXXVII of 2007 on Value Added Tax, Section 124(4)(a) (50% of the input VAT on services for operating a passenger car is not deductible)
