By way of example, the lack of VAT authorisation for an amicable settlement is as follows: in practice and to the detriment of the seller receiving a settlement payment, it seems that the parties to an out-of-court settlement often ignore the VAT treatment of settlement payments and, as such, do not take into account the VAT component when agreeing on a settlement amount or agree on the agreement in Compliance. If the settlement agreement does not specify whether payment of the settlement is made with or without VAT, the payment of the invoice is deemed to include VAT in the amount of the standard rate of 15% within the meaning of Article 64 of the VAT Act. The supplier seller, i.e. the recipient of the payment, is therefore obliged to enter the VAT therein and cannot claim the amount of VAT from the other party in addition to the payment of the invoice already agreed in the context of the settlement agreement. This is in line with the approach of our courts, which have concluded that the obligation to pay VAT for a transaction for which VAT is due rests with the supplier seller and not with the recipient. It is important to properly shape the treatment of VAT in the settlement agreement itself by answering these questions: parties to a dispute often opt for an “out-of-court” settlement as opposed to a lengthy legal dispute with uncertain outcomes and high legal costs. At some level, an out-of-court settlement should be a victory for both sides. However, if the parties are VAT sellers, it is often the party receiving the settlement payment that remains with a slightly bitter taste in the mouth if VAT has not been taken into account when agreeing on the amount of the settlement to be paid. The VAT treatment of payments made under a transactional agreement depends on the amount paid. Compensation paid for loss or damage suffered is generally not subject to VAT because it is not paid for the supply of anything, whereas a settlement payment made to a seller in exchange for consent waives its right to take legal action in connection with an existing claim constitutes consideration for a service and is subject to VAT. What about intellectual property infringements? In the wake of the above, payment received by a party for infringement of intellectual property rights (such as copyrights, trademarks, designs or patents) does not fall within the scope of VAT.
In this case, the payment is considered exclusively as compensation for the violation of a person`s rights and therefore will not be treated as consideration for the delivery. HMRC treats this principle in such a way that it applies to damages awarded by a court in connection with intellectual property infringement proceedings and extrajudicial intellectual property infringement proceedings. In view of the above, sellers who conclude out-of-court settlements, in particular the seller who receives payment of a settlement amount, are reminded that it is important to explicitly state in the settlement contract what the payment of the settlement is for and whether the payment of the agreed settlement is exclusive or includes VAT if VAT is due. If the VAT settlement agreement is silent, the payment is deemed to include VAT if it is made for the services supplied. As a result, the seller who receives such a payment is required to record the exit tax on the settlement amount in the amount of the tax part, which leaves the recipient out of his pocket and ultimately settles for less. Given the significant change in the UK`s VAT policy in this regard, if you have received a payment under a settlement agreement that was previously considered to be outside the scope of VAT, you will need to check as soon as possible whether VAT is now being collected. As with any payment that can attract VAT, it is important to get the right treatment. If the payment is subject to VAT, the plaintiff will require the defendant to pay VAT in addition to the principal payment of damages or compensation. If the payment is made under a settlement agreement, the agreement must provide that VAT is payable in addition to the principal amount, otherwise the payment will be treated as VAT included.
If the defendant is a company with a full VAT refund, he should be able to recover the VAT, but only if the VAT was actually due. It follows that if a disputing party agrees to waive its right to bring legal action against another party for a settlement payment, the settlement payment constitutes an identifiable payment based on reciprocity and directly related to the supplier party`s right to bring legal action against the other party. . . .