Record the loss when it happens and the insurance money only when it is virtually certain to be paid, which in practice usually means the insurer has accepted the claim and agreed a figure. The loss and the recovery are separate entries, often in different periods: written off stock or a destroyed asset goes through the accounts straight away, and the claim becomes a debtor once it is secure. The payout is compensation, not a sale, so it does not go in turnover and carries no output VAT.

What goes in the books when the damage happens?

A fire, flood or theft creates two separate things for the accounts: a loss, and a possible claim against the insurer. They are recorded separately and on different tests, so the first job is to record the loss on its own, without netting off what you expect to recover.

  • Stock. FRS 102 paragraph 13.19 points to paragraphs 27.2 to 27.4, which require a business to assess at each reporting date whether inventories are impaired, giving damage as an example, and to measure impaired stock at selling price less costs to complete and sell. Stock that is destroyed is written off in full; stock that is only damaged is written down to what it will now fetch.
  • Fixed assets. Under paragraph 17.27 an item of property, plant and equipment is derecognised when no future economic benefits are expected from its use or disposal. A machine destroyed in a fire comes off the fixed asset register, and the loss is its carrying amount (paragraph 17.30). An asset that is only damaged stays on the register and is tested for impairment.
  • Extra costs. Clean up, temporary premises, hired equipment and overtime are expenses of the period in which they are incurred, whatever the insurer later pays.

When can the insurance money be recorded?

The test is strict. Paragraph 17.25 says compensation from third parties for items of property, plant and equipment that were impaired, lost or given up goes into profit or loss only when the compensation is virtually certain. Paragraph 21.13 sets the general rule for any other claim: a contingent asset is not recognised, but it is disclosed when an inflow is probable, and once the inflow is virtually certain it is no longer a contingent asset and is recognised.

Submitting a claim is not enough, and neither is a strong belief that the policy covers the loss. Evidence that usually gets a claim to virtually certain includes:

  • written acceptance of liability from the insurer, with no outstanding policy questions;
  • a settlement figure agreed with the loss adjuster;
  • an interim payment, which is recognised to the extent it has been paid or agreed.

If the insurer is still investigating at the year end, record the loss, leave the recovery out, and disclose the claim in the notes if a payout is probable. The same timing questions arise for any compensation; FRS 102 Section 21: provisions and contingencies explains the probable and virtually certain thresholds in more detail.

What are the double entries?

Event Debit Credit
Stock destroyed Stock loss (cost of sales or a separate loss line) Stock
Fixed asset destroyed Accumulated depreciation, and loss on disposal for the carrying amount Fixed asset cost
Claim becomes virtually certain Insurance claim receivable Insurance recoveries (other operating income)
Insurer pays Bank Insurance claim receivable
Replacement asset bought Fixed asset cost (new asset) Bank or purchase ledger

Keep the recovery out of turnover. FRS 102 paragraph 17.28 says a gain on derecognising property, plant and equipment is not classified as revenue, and showing stock and income recoveries as other operating income keeps the gross margin meaningful. Where the claim relates to a provision, paragraph 21.9 requires the reimbursement to be shown as a separate asset, not offset against the provision, and capped at the amount of the provision. The policy excess is never received, so it simply stays as part of the net loss.

How is a destroyed fixed asset handled?

Treat the destroyed asset and its replacement as two separate assets. The old one is derecognised on the date it was destroyed, with depreciation charged up to that date. The insurance money is recognised under paragraph 17.25 when virtually certain. The replacement is capitalised at its own cost when it is bought, and depreciated from when it comes into use. The general mechanics are in accounting for the disposal of fixed assets.

For tax, HMRC’s Business Income Manual at BIM40755 says a sum received under a policy insuring a fixed asset against damage or loss is a capital receipt, although repair or renewal costs may be deductible, and a capital sum recovered for an expense already deducted is taxable up to the amount deducted. For plant and machinery, section 61 of the Capital Allowances Act 2001 treats insurance money received on the destruction or permanent loss of the asset as part of its disposal value, so it goes into the capital allowances computation. Chargeable gains on buildings and other assets are covered in insurance payouts and compensation: CGT treatment.

How is a claim for stock or lost income recorded?

Stock claims and business interruption claims are revenue items. BIM40751 lists as trading receipts recoveries that compensate for a hole in profits, either because income fails to materialise or because an extra cost is incurred, even if the compensation exceeds the hole, and recoveries under insurance of stock in trade, including any excess over the cost of the stock. BIM45851 confirms that a loss of stock or cash by fire, burglary, theft or employee negligence is ordinarily deductible to the extent not covered by insurance.

On timing, BIM40751 says recoveries are included in trade profits under generally accepted accounting practice, with the date of the event and the ascertainment of the loss both relevant. A business interruption claim is often agreed long after the period it covers, so at a year end the question is how much of it is virtually certain, not how much has been claimed. Self employed traders using the cash basis, which is now the default, record income when it is received, so the payout goes in the period the insurer pays.

Before any stock claim is submitted, count and value what was lost on the same basis as the normal year end valuation; see stock valuation. The count sheet supports both the claim and the write off.

How does VAT work on an insurance payout?

HMRC’s VAT Input Tax manual at VIT13500 says payments received by policy holders from insurers are compensation for the loss incurred and not consideration for any supply, so no output VAT is due on the payout. The insurer will normally pay a VAT registered policy holder compensation exclusive of VAT; the business pays the repairer or supplier the VAT and recovers it as input tax under the normal rules. VIT13500 adds that telling the insurer you are VAT registered does not itself give you the right to recover the VAT, for example where the business is partly exempt.

In the books, that means the repair or replacement invoice goes through the purchase ledger with its VAT, and the insurance receivable is recorded net. HMRC’s VAT Supply and Consideration manual at VATSC06540 also confirms that a policy excess paid by the policy holder is not consideration for any supply.

What does a worked example look like?

Illustration only. A VAT registered retailer with a 31 March year end has a flood on 10 March. Stock costing £8,000 is ruined and shelving with a carrying amount of £3,000 is destroyed. On 28 March the loss adjuster agrees a settlement in writing: £8,000 for stock and £3,000 for shelving, less a £500 excess, so £10,500 in total. The money arrives on 20 April.

Date Entry £
10 March Dr stock loss, Cr stock 8,000
10 March Dr loss on disposal, Cr shelving (net) 3,000
28 March Dr insurance claim receivable, Cr insurance recoveries 10,500
20 April Dr bank, Cr insurance claim receivable 10,500

The net charge to profit for the year is £500, which is the excess. If the insurer had still been disputing cover at 31 March, the accounts would show the £11,000 of losses with no recovery, and the claim would be disclosed if a payout was probable. New shelving bought in April is a new fixed asset at its own cost. For tax, the stock element is a trading receipt; the shelving element is capital and is brought into the capital allowances computation as part of the disposal value.

What mistakes come up most often?

  • Booking the claim on submission. A claim form is not evidence that the money is virtually certain.
  • Netting the loss and the recovery. The loss and the receivable are separate entries, and the gross figures should be visible.
  • Putting the payout in sales. It inflates turnover and distorts the margin.
  • Charging output VAT on the payout, or claiming input tax on a replacement that the insurer has paid for gross.
  • Leaving the destroyed asset on the register and continuing to depreciate it.
  • Forgetting the capital allowances disposal value for plant that was destroyed or permanently lost.
  • Treating premiums and payouts the same way. Whether the premium was deductible does not decide how the recovery is taxed; BIM40751 says so expressly. Premium deductibility is covered in are business insurance premiums tax deductible, and landlords should see insurance payouts on rental property.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.