You’d have to enter the full amount at 20% VAT from which the £40.75 is calculated, then add a second negative line to the invoice at “no vat” to reduce the net, e.g.
- £203.75 @ 20% “Windscreen replacement”
- -99.59 @ 0% “less contribution from insurance”
When it comes to your VAT return I have been advised by HRMC to add the insurance contribution to box 7, as it’s an expense you’ve incurred even though the insurance paid it on your behalf.
(Well actually, I queried this with them by email, got no response for ages so I phoned the helpline. The person on the phone told me not to add anything to box 7, but the email reply arrived a couple of days later saying I should, and I’ve gone with what they told me in writing rather than verbally so I can back it up if I’m ever inspected)