The VAT treatment of payments made under a transaction agreement is determined according to the amount paid with respect to the amount. As a general rule, compensation for losses or damages incurred is not subject to VAT, as it is not paid for the supply of anything, whereas compensation paid to a seller in return for his right to sue an existing debt is a consideration for a service provision and is subject to VAT. The Commissioners of Customs – Excise have reviewed their VAT payment processing policy as part of the out-of-court settlement of disputes, after the proceedings have been initiated by the service of an original procedure (or the appointment of an arbitrator). Transaction agreements that will compensate for losses or damages may also provide for the full and final payment of the debt. However, such a clause is included in the agreement to facilitate settlement. Compensation is paid to compensate the applicant for losses or damages incurred and no part of the payment is paid in return for the applicant who is right about his right to sue. In this scenario, no VAT is due by the recipient of the compensation. As an illustration, the possibility of not allowing VAT in the event of an out-of-court settlement has the following effect: parties to a dispute can often opt for an out-of-court settlement, unlike a lengthy court dispute where the outcome is uncertain and the costs of trial are high. At some level, an out-of-court settlement should be of benefit to both parties. However, when the parties are SELLERS of VAT, it is often the party that receives the compensation, which has a somewhat bitter taste in the mouth, when VAT has not been taken into account in the agreement on the amount of compensation to be paid. On the basis that the supplier, i.e. the supplier receiving the payment, must account for VAT on the compensation received, that seller must issue the other party a tax invoice that reflects the VAT contained in the amount of compensation. The party making the payment, as the beneficiary of the services, should then have the right to demand a deduction of VAT on the VAT paid in the course of its taxable activities.
It follows that the party receiving the payment is left out of its wallet, while the party making the payment is used to the extent of the claimed deduction. Compensation, including.B. judicial or extrajudicial transactions, is generally «outside the scope» of VAT. Until 1987, HMRC considered out-of-court transactions to be considered a consideration for the abandonment of the right of action and therefore taxable. Hmrc explained its change of view in the press release 82/1987 (19 November 1987) as follows: the text of a transaction agreement with the indication of an overall figure paid in one direction implies a regulation of all claims that can circumvent this issue (since there is no compensation at that time). Before that date, sellers who receive extrajudicial accounts, in particular the seller who receives payment of compensation, are reminded of the importance of explicitly stating in the transaction contract the compensation for which the compensation is paid and whether the agreed compensation is exclusively or included tva when VAT is to be paid. If the VAT transaction contract is silent, the payment is considered to be included by VAT when it is provided for services provided.