VAT treatment of damages and compensation payments


Published by a UUÂãÁÄÖ±²¥ Tax expert
Practice notes
In-house

VAT treatment of damages and compensation payments


Published by a UUÂãÁÄÖ±²¥ Tax expert

Practice notes
In-house
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A damages or compensation payment may attract VAT. This depends on exactly what the payment is for. If it is purely compensatory, such that it does not amount to consideration linked to a supply, it will be outside the scope of VAT. If, on the other hand, the recipient of the payment (the claimant) does something in return, this will be a supply for VAT purposes.

As with any payment that may attract VAT, it is important to get the treatment right. If the payment is VATable the claimant will want the defendant to pay VAT in addition to the main payment of damages or compensation. If the payment is made under a settlement agreement, the agreement should provide that any VAT is payable in addition to the principal amount, otherwise the payment will be treated as VAT-inclusive. If the defendant is a business with full VAT recovery it should be able to reclaim the VAT, but only if VAT was in fact due.

Much of the case law in this area derives from the

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Jurisdiction(s):
United Kingdom
Related legal acts:
Key definition:
Damages definition
What does Damages mean?

The monetary compensation awarded by law to a person for the legal wrong done to him.

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