DRN-6291687

The complaint Mr and Mrs A complain Aviva Insurance Limited has unfairly withheld VAT from a cash settlement offer it made to settle a claim made on a buildings insurance policy. What happened Mr and Mrs A have an ongoing subsidence claim with Aviva. The claim has been subject to complaints previously considered by this Service. A cash settlement offer for the works needed to the property has now been agreed, but Mr and Mrs A raised a complaint with Aviva, because it said VAT would be payable on receipt of a VAT invoice, but wouldn’t be paid upfront. Aviva also said it wouldn’t pay any alternative accommodation (AA) costs upfront. It said it needed evidence of a tenancy agreement to ensure payments made are accurate and based on verified arrangements. Aviva issued a complaint response but didn’t change its position and so Mr and Mrs A referred the matter to the Financial Ombudsman Service. Our Investigator said whilst this Service sometimes does think it’s fair and reasonable for a business to pay VAT upfront when settling the claim, he didn’t think Aviva had acted unfairly in the circumstances of this complaint when not doing so. Nor did he think it was unreasonable for Aviva to withhold AA costs until evidence of this cost was presented to it. But he recommended Aviva pay £150 compensation for giving Mr and Mrs A some incorrect information which had caused unnecessary frustration. Aviva accepted that outcome, but Mr and Mrs A didn’t. They said HMRC rules said that VAT should only be deducted from a compensation payment when the policyholder is VAT registered. He also said anything other than a one-off full payment is not a cash settlement, and that the policy document is silent on the matter, and so VAT is deemed to be included in a cash settlement offer. What I’ve decided – and why I’ve considered all the available evidence and arguments to decide what’s fair and reasonable in the circumstances of this complaint. Before getting into my findings, it’s important to set out that the cash settlement itself is not in dispute. As such, this decision doesn’t cover the cash settlement already agreed between the parties. I’m setting that out because the cash settlement for the repairs needed exceeds the award limit of this Service. But given that amount isn’t in dispute, Mr and Mrs A accepting (or rejecting) this decision won’t affect their rights in respect of the cash settlement payment. Having considered what is in dispute, my findings are the same as that of our Investigator. As such, I’m not going to require Aviva to pay VAT now, or pay AA costs now, upfront. I’ve explained why below. VAT The general position of this Service is that when an insurer is settling a claim by paying a cash settlement, it’s reasonable for the insurer not to include VAT into the settlement initially. That’s because the VAT doesn’t form part of the cost of the work itself, it’s an extra amount in addition to the cost of the work, which the contractor must then pay to HMRC. And so only

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when a consumer can show they’ve been charged VAT, would we generally expect an insurer to reimburse that amount. I accept that the policy document is silent on the payment of VAT, it simply says that it can settle a claim by paying cash instead of carrying out repairs. But being silent on at what point VAT will be paid, doesn’t mean it should then be paid upfront. I’ve reviewed the HMRC guidance Mr A has quoted to this Service, but I’m not satisfied it says that VAT must be paid upfront when a claim is settled by way of paying cash. Mr A’s position is that the guidance says a cash settlement from an insurer is considered outside of the scope for VAT. My understanding of that part of the guidance is that it means an insurer doesn’t have to pay VAT to HMRC on the settlement amount it pays to Mr and Mrs A. But even if my interpretation of that is incorrect, a cash settlement being ‘out of scope’ for VAT, doesn’t, to me, mean it should be paid upfront. Mr A has also said VAT can only be withheld on compensation if he is a commercial customer, which he is not. But the cash settlement amount isn’t compensation, it is indemnification of the cost of the works needed, that are covered under his insurance policy. Mr A says guidance on our external website says where there is a detailed estimate for the work and the contractor has said it charges VAT, we’re likely to say VAT should be included in the settlement. But it’s important that each case is considered separately, on its merits. It doesn’t seem to me that Mr A, at the point of referring the complaint to this Service, has instructed the contractor whose tender costs have been agreed. And given the scale of the project – with there being reference to twelve months’ worth of work needed – it seems unlikely to me that Mr and Mrs A will need to pay the full cash settlement amount upfront to the contractor. As such, I can’t see that Aviva not paying VAT at this stage will cause a disadvantage to them or mean they struggle to finance the initial stage of the works. I can appreciate Mr and Mrs A’s desire to move on without having to refer back to Aviva in future over VAT payments. I understand this has been a long running claim, and there are ongoing health challenges for Mr and Mrs A to navigate. If Mr and Mrs A instruct the contractor, and it sets out a staged payment arrangement over the course of the works, I would expect Aviva to consider paying VAT on those staged payments at set times, to create certainty for all parties. Or like our Investigator suggested, Aviva and Mr A’s contractor could agree that the VAT is paid directly to the contractor on completion of the works (or each ‘stage’ of the works). But I’m not going to require Aviva to pay all of the VAT to Mr and Mrs A now. Aviva accepted our Investigator’s recommendation to pay £150 for some incorrect advice it gave around the HMRC guidance. I’m satisfied that is a reasonable sum for it to pay for the frustration it unnecessarily caused, as such Aviva will now need to pay this amount to resolve the complaint. Alternative accommodation (AA) It’s not clear whether this matter is still in dispute, since Mr and Mrs A didn’t raise any comments in response to our Investigator’s findings on this. But for completeness I’ll set out that I consider Aviva’s position on this reasonable. Mr and Mrs A found AA which would cost £3,000 per month, but it wasn’t available. I appreciate that Mr and Mrs A said they’d be willing to accept £3,000 per month in order to find something (with that amount perhaps being less than what they’d need to find a property comparable to their own) but I think its reasonable that Aviva would want to see that AA has been secured, and the rate that was being charged, before agreeing to pay. As such I’m not going to require it to pay AA upfront.

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My final decision My final decision is that I uphold this complaint and I direct Aviva Insurance Limited to pay £150 to resolve this complaint. Under the rules of the Financial Ombudsman Service, I’m required to ask Mr A and Mrs A to accept or reject my decision before 21 May 2026. Michelle Henderson Ombudsman

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