The VAT treatment of payments made under a settlement agreement depends on the amount paid. Compensation for loss or damage suffered is normally not subject to VAT as it is not made for the supply of anything, whereas a transactional payment to a vendor in exchange for agreeing to waive his right to sue in respect of an existing claim constitutes consideration for a service and is subject to VAT. It follows that, where a party to the dispute agrees to waive its right to bring legal action against another party against a settlement payment, the settlement payment constitutes an identifiable payment based on reciprocity and directly linked to the losing party`s right to bring legal action against the opposing party. Where a vendor waives this right in connection with or to promote his business, the settlement payment received is the consideration for the taxable supply of services. The seller who receives the settlement payment must therefore declare VAT for the amount of the tax offense (15/115) of the payment. However, formulating a settlement agreement indicating a total amount paid one way can avoid this problem (since there is no compensation at all). What happens if counterclaims have been included in the settlement? Unfortunately, VAT cannot be cancelled by compensatory payments. If a settlement agreement expressly provides for the settlement of claim X and counterclaim Y where Y is subject to VAT but X is not, you cannot deduct Y from X and say that the amount is not subject to VAT. According to the previous position, a settlement relating to several claims, where some offsets were subject to VAT and others were not, could be problematic.
It was good practice to clearly allocate and clarify the elements of the settlement amount subject to VAT and non-VAT, otherwise there was a risk that HMRC would consider the entire payment as a single composite supply (most likely subject to VAT). Settlement agreements under which compensation is paid for loss or damage may also provide for payment to be made in full and final settlement of the claim. However, such a clause is included in the agreement to facilitate settlement. The settlement payment is made to compensate the claimant for the loss or damage suffered, and no part of the payment is made in return for the claimant, who waives his right to take legal action. In this scenario, no VAT is due by the recipient of the compensation payment. This blog does not give legal advice. If you require assistance in creating intellectual property licenses or assessing whether VAT may apply when modifying or terminating such licenses or in connection with intellectual property infringements, please contact Carlton Daniel, IP/Business Partner, or Tim Jarvis, Tax Associate. Parties to a dispute often opt for an “amicable” settlement rather than a lengthy legal dispute with an uncertain outcome and high legal costs. At some level, an out-of-court settlement should be a win-win situation. However, if the parties are VAT sellers, it is often the party receiving payment of the settlement that has a slightly bitter aftertaste in the mouth if VAT has not been taken into account when agreeing on the amount of settlement to be paid. However, the Supreme Court of Appeal, after reviewing the credit agreements with the customers, found that the loan coverage was indeed provided without consideration. These agreements stipulated that no creditor or optional life insurance would be charged.
An excerpt from the agreement confirms that the fees are included in the interest rate charged. Since the credit industry is regulated, the taxpayer can only charge fees under the provisions of the National Credit Act and, therefore, not bundle them with regulated fees. Since there is no consideration, the provision of credit coverage cannot be considered a commercial activity. The Supreme Court of Appeal thus held that the cover of the loan was granted in the context of exempt supplies, since the policies ensured the recovery of the credit granted to their customers and the deduction of input VAT was not authorised. This applies in particular to businesses in VAT-exempt sectors, such as financial services, where VAT refunds are limited or non-existent. Similarly, a beneficiary will want to ensure that they receive that extra 20% if they have to pay HMRC VAT on the payment. The standard VAT in the UK is currently 20%. The determination of whether a 20% surcharge is due on a payment may affect the feasibility of the settlement decision underlying the amount of that payment to the payer.
The Finance Court held that the commission income received in excess of the interest expense is part of the consideration for the granting of the loan and that the coverage of the loan is promoted and provided within the framework of the company, which also includes taxable services. The Finanzgericht therefore held that VAT was deductible. It is important to obtain proper VAT treatment in the settlement agreement itself by answering the following questions: Home » VAT on compensation payments in intellectual property regulations Coronavirus (COVID-19): During the current pandemic, laws and changes in practice and procedure have been introduced before the courts regarding:• Property procedures•Forfeiture of commercial leases due to non-payment of rent• The court found that the fact that fines were punishable under local law or treated as fines was irrelevant and that the principles of “fiscal neutrality” required that VAT be applied to both fines and parking, so that “good” parking and “bad parking” were treated equally. Although the UK is not directly bound by decisions taken after Brexit, under “EU law maintained”, the UK is still obliged to respect the principles of fiscal neutrality, so there may still be arguments related to HMRC`s approach. Similarly, damages calculated in accordance with the provisions of a contract, such as liquidated damages, usually found in construction contracts, were considered non-taxable compensation for loss of profits.