This often causes confusion, firstly because many people wrongly assume that IPT (Insurance Premium Tax) is VAT, it isn’t! and then when they make a claim they may get a VAT only invoice.
HMRC VIT13500 has the answer…
Insurers cannot recover any VAT incurred in obtaining replacement goods or having repairs carried out for a policy holder. The supply of goods (or services in the case of repairs) is considered to be made to the policy holder. This is so even when payment is made directly to the supplier by the insurer.
Subject to the normal rules a VAT registered policy holder may treat any VAT incurred on the supply as input tax. The insurer will normally pay the policy holder compensation exclusive of VAT. The policy holder will pay the supplier the tax and recover it as input tax.
If an insurance claim is for loss or damage at a domestic property you should make sure that any VAT claimed as input tax relates only to goods used for a business purpose.
Insurance and reinsurance is exempt from VAT under article 135 of the Sixth VAT Directive.
This also explains why an insurer may ask a contractor engaged in repair work not to invoice them VAT, its simply that they want the VAT only element to be invoiced to the insured.