The processing of VAT for payments made under a transaction agreement depends on the amount for which the amount is paid. As a general rule, compensation for loss or damage suffered is not subject to VAT, as it is not paid for the delivery of anything, while a transaction paid to a seller in return for permission to waive his right to take legal action in respect of an existing claim constitutes consideration for a service and is subject to VAT. Press release 82/87 was adopted with the aim of limiting its application to actual disputes. If a settlement agreement has been drafted in such a way that the plaintiff waives the right to sue the defendant for a sum of money, it is not a delivery. If the non-recourse and out-of-court settlement agreement confirms a previously agreed price or confirms a reduction to a previously agreed price, VAT will be adjusted using the credit mechanism by referring to the definitively agreed price. The situation in which payment was made subject to a court order remained unchanged. VAT is levied on the value of the supply of goods or services made by a seller in the context of or for the promotion of a business by that seller. VAT is therefore not a tax levied on revenue. The value to be provided is the amount of the “consideration” for such a delivery.
The amount must therefore be paid for, in response to or for the incentive to supply goods or services, so that the amount is subject to VAT. There must be a sufficient link between delivery and payment for the payment to constitute consideration. It follows that, where compensation is paid to a seller, it must be ascer reached whether the payment constitutes consideration for the supply of goods or services by that seller. Previous HM Revenue & Customs (HMRC) guidelines that have been withdrawn have stated that when customers have to terminate agreements to receive goods or services, these fees are generally not levied for a delivery and are outside the scope of VAT. Compensation for infringement was considered as compensation for a loss of profit and not as consideration for a supply (and therefore not as VAT). Transaction agreements in which compensation is paid in the event of loss or damage suffered may also provide that payment is fully and definitively settled. However, such a clause is included in the agreement in order to facilitate the agreement. Payment for the settlement is made to compensate the claimant for loss or damage suffered and no part of the payment is paid in return for the claimant who waives his or her right to take legal action. In this scenario, no VAT is payable by the recipient of the compensation. If the payment is VATable, the plaintiff will require the defendant to pay VAT in addition to the principal payment of damages or indemnification….