In a claim, the repair invoice is gross, while the insurer's transfer is often net – and the difference between the two is the amount of the VAT. As a broker, I see that most company managers first discover that the insurer “did not pay the VAT” when they have a claim, and many think it is a mistake or stinginess. Yet the rule is logical and rests on legislation and on the policy conditions: VAT is a loss only for someone who does not get it back. In this article I go through when the payment is net and when it is gross, what role the invoice plays, and what is worth stating precisely when you report the claim.
- Under Section 120 of the VAT Act (Áfa tv.), a VAT-registered company deducts the VAT on the repair invoice, so that VAT is not a loss: policy conditions typically pay the net amount to anyone who can reclaim the VAT.
- Under Section 123 of the Insurance Act (Bit.), the insurer may undertake to reimburse VAT only against an invoice – without an invoice, the net, calculated repair cost is payable.
- The VAT declaration in the claim notification and whether the sum insured is set net or gross decide the outcome together: the company's VAT status and the amounts on the policy must be consistent.
Why is VAT not a loss for someone who reclaims it?
Under Section 120 of Act CXXVII of 2007 on value added tax (the VAT Act, Áfa tv.), a taxable person may deduct from the tax it owes the VAT charged to it on services used and goods purchased for its taxable activities. So if a VAT-registered company orders the repair of its burnt-out workshop on a gross invoice, it deducts the VAT on that invoice in its tax return – that money does not remain with it as a cost. The purpose of compensation, in turn, is to restore the injured party's financial position, not to improve it: under Section 6:522(3) of the Hungarian Civil Code (Ptk.), compensation must be reduced by the financial advantage the injured party gains from the damage. Legal literature calls this the prohibition of profiting from a loss. If the insurer also reimbursed the reclaimable VAT, the company would receive the same amount twice: once from the state and once from the insurer. According to a study in the journal Kártérítési és Biztosítási Jog (Compensation and Insurance Law), case law on this point has not been uniform – one decision placed the burden of proof on the injured party – but insurers' policy conditions today typically follow the principle of net payment for clients entitled to deduct VAT. A separate question is whether VAT has to be paid on the payment received from the insurer: no, because under point 6 of Section 259 of the VAT Act, compensation does not qualify as consideration, so the company does not invoice the insurer.
What the conditions say: two conditions together
Hungarian corporate property insurance conditions typically make reimbursement of VAT subject to two cumulative conditions: the insured has actually incurred a VAT liability in connection with the repair or replacement, and cannot reclaim that VAT. The all-risks property insurance conditions of one Hungarian insurer, for example, state that VAT is reimbursed only if the insured cannot reclaim it, and only on the basis of an invoice showing the amount of VAT. Behind this lies Section 123 of Act LXXXVIII of 2014 on the business of insurance (the Insurance Act, Bit.): the insurer may undertake to reimburse an amount equal to the VAT only on the basis of an invoice. In practice this means three groups. A company entitled to deduct VAT receives a net payment and settles the VAT on the repair in its tax return. A business under the small-business (subjective) VAT exemption or carrying on exclusively VAT-exempt activities – for example, many healthcare or education providers – is entitled to the gross amount, but can prove this only with a VAT invoice. For a company with a partial right of deduction that apportions its input VAT, the situation is more complex: the conditions and claims practice differ from insurer to insurer, so it is worth indicating this as early as the claim notification and agreeing it with your accountant.
Without an invoice: what is payable, and what is not?
The insured is not obliged to repair the damaged asset; it may have the damage repaired in-house, even without an invoice – but it can claim reimbursement of VAT only on the basis of a VAT invoice. Without an invoice, the insurer pays the net repair cost calculated according to its conditions. For a company this is rarely a disadvantage: a VAT-registered company would not receive the VAT anyway, while for one that is not VAT-registered, the invoice is essential for the gross amount. In a home insurance case (Pfv.V.20.993/2020/6.), the Kúria (Hungary's Supreme Court) also ruled that where the condition is tied not to the cost of the work actually carried out but to a theoretical repair value, the insurer must pay the gross amount – but this was a home insurance case, the Kúria based its ruling on the interpretation rule for unclear terms (Ptk. Section 6:86: in case of doubt, a standard contract term must be interpreted in favour of the party contracting with the party that applies it – this rule also applies in corporate contracts), and it noted that Section 123 of the Bit. developed in the field of motor third-party liability (MTPL) insurance. In corporate property insurance, therefore, it is primarily the wording of the condition that decides: today's conditions typically state precisely whether they pay on the basis of an invoice or at a calculated value; the details differ from insurer to insurer.
The VAT declaration, the deductible and depreciation: where the figures slip
Claim notification forms typically include a VAT declaration: the company declares whether it is entitled to deduct VAT. This is not a formality but the basis of the payment – if it is filled in incorrectly, the insurer transfers a net amount when a gross amount would be due, or pays VAT to a company that reclaims it, which the insurer may later demand back. Two other points are worth watching. The conditions typically subtract the deductible from the assessed amount of the loss, and depreciation is also applied to the repair cost; together with these, the net–gross question determines the final amount, so it is worth reviewing the claim calculation item by item – the loss assessment and settlement article gives guidance here. The same logic applies when setting the sum insured: a VAT-registered company should typically insure its buildings and machinery at net reinstatement value, and a company that does not deduct VAT at gross value – I have written about this in more detail in the reinstatement value and actual value article and the building value article. Anyone who insures at gross value but receives a net payment has paid premium unnecessarily; anyone who insures at net value but would be entitled to gross may be underinsured when a claim arises.
What should the company do before and after a loss?
Before a loss: clarify with your accountant whether, given the company's VAT status, you should insure at net or gross amounts, and carry this through to the sums insured – the value on the policy and the VAT status should be consistent. After a loss: fill in the VAT declaration accurately when reporting the claim; if the company does not deduct VAT, order the repair with a VAT invoice; and check the claim calculation item by item. If the insurer has transferred a net amount but the company is not entitled to deduct VAT, the missing documents to supply are typically the invoice and proof of the company's VAT status – the sequence in the supplying missing documents article can be used here too. The primary route for reporting a claim is the insurer's claims line; if the case gets stuck or becomes disputed on the net–gross question, I help where I can, acting on the company's behalf – by reviewing the contract wording and the claim calculation. I cannot promise anything: the insurer pays only for what is an insured event under the contract, and in the way its conditions describe the payment.
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Sources
- VAT Act (Áfa tv.) – Act CXXVII of 2007 (Section 120: right of deduction; Section 259 point 6: consideration)
- Hungarian Civil Code (Ptk.) – Act V of 2013, Section 6:522(3) (reduction of compensation by the financial advantage – prohibition of profiting from a loss)
- Insurance Act (Bit.) – Act LXXXVIII of 2014, Section 123 (VAT reimbursed only against an invoice)
- GMT Legal: Gross or net – when must the insurer reimburse the VAT on repair costs? (Kúria Pfv.V.20.993/2020/6.)
- Ferenc Németh: The prohibition of profiting from a loss where VAT is reclaimable (Kártérítési és Biztosítási Jog, 2022/4)
- UNIQA All Risks property and business interruption insurance conditions (31 July 2024), point 1.9.8 – reimbursement of VAT
- Generali General Property Insurance Conditions (ÁVF, text of 15 July 2001 under the old Civil Code – the current Generali conditions may differ), point IV.8 – conditions for reimbursing VAT
