Insurers will have to pay VAT on repair bills for the summer flood damage

The government could pocket more than £500m from VAT on repairs carried out by insurers after the summer floods – almost as much as that spent this year on flood defences, an MP has claimed.

Beverley and Holderness MP Graham Stuart believes the amount the Treasury will receive in VAT on repair work carried out by insurance companies will dwarf the amount of cash pledged by the government to restore flood-hit areas.

VAT is levied at the full rate of 17.5% on most building repair work, and with insurers estimating the total repair bill will hit £3bn, £525m could be generated in VAT.

The Treasury said the government was not able to apply a reduced VAT rate for flood damage repairs because of a European agreement. A spokesman said: “We have offered relief and support for flood victims, but when it comes to VAT because of a European agreement, we cannot zero rate it.”

Stuart said it would be wrong for the government to make a profit from the floods and has tabled parliamentary questions to Chancellor Alistair Darling asking how much the Treasury has received through VAT from work carried out by insurers. He has also written to the ABI.

He said: “The insurance industry has identified that its exposure will be towards £3bn and, ultimately, might exceed that figure. The industry will have to pay VAT on all repair work it carries out, so it is easy to see that the Chancellor is receiving a huge windfall.”

To date the government has made available a package of up to £86m to assist the affected regions, including funding for schools, transport and businesses. Flood defence spending will increase to £800m by 2010.