It is important for both parties (particularly the beneficiary) to include in the transaction agreement the words „possibly plus VAT“. For what happens if the counter-claims are bent in the comparison? Unfortunately, VAT cannot be denied against each other by offset payments. If a settlement agreement is expressly for the payment of a claim X and counter-contest Y, Y being VATable, but X no, you cannot deduct Y from X and say that the sum is not VATable. It is important to treat VAT in the settlement agreement itself by answering these questions: remember that a tacit contract is a contract with VAT and that it is too late for the beneficiary to return for the additional 20% once the contract is signed. 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 his change of opinion in the press release 82/1987 (19 November 1987) as follows: if a party to the dispute agrees to waive his right to sue another party against a transaction payment, the compensation constitutes an identifiable, reciprocal payment directly related to the capitulating party`s right to take legal action against the party in question. When the right is abandoned by a seller as part of or as part of the promotion of his business, the compensation received is a consideration for the taxable benefit of a service. As a result, the creditor who receives the compensation must account for VAT on it at the level of the tax share (15/115) of the payment. However, the formulation of a transaction agreement, by adding an overall figure paid in one direction to a tally of all receivables, can avoid this issue (since there is no compensation at that time). Litigation parties can often opt for an out-of-court settlement, unlike a lengthy litigation, where the outcome is uncertain and legal costs 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. 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. In practice and to the detriment of the seller who receives a settlement, it appears that parties to an out-of-court settlement are often not informed of the VAT treatment on compensation and, as such, do not take into account the VAT component in the agreement or agreement. If the transaction agreement does not specify whether the compensation is included or VAT-free, the compensation is considered to be VAT included at the standard rate of 15% within the meaning of Section 64 of the VAT Act. The supplier seller, i.e. the recipient of the payment, is therefore obliged to pay VAT and cannot recover the amount of VAT from the other party in addition to the compensation already agreed under the transaction agreement.