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taxadvisor.uk, Chartered Certified Accountant
Category: Tax
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Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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A & B entered a building contract which was cancelled midway

Customer Question

A & B entered a building contract which was cancelled midway due to disagreements between the parties The builder maintains that he is entitled to payment of 20000 pounds for work plus damages done while customer denies builder entitled to any amount & maintains builder liable to pay him damages. Without admission of liabillity on both sides it it agreed to avoid protracted & costly litigation that the customer will pay builder a sum of 15000 in settle of all claims which either party may have against the other Is VAT payable on this settlement payment
Submitted: 3 years ago.
Category: Tax
Expert:  taxadvisor.uk replied 3 years ago.
Hello and welcome to the site. Thank you for your question.

As the settlement is in lieu of all claims including claim for work done, then this payment would attract VAT.

On the other hand, if the payment is liquidated damages i.e. agreed pre-estimated sums to be paid in the event of a breach of contract by one of the parties, then the builder is not receiving payment for a suply and NO VAT is due on that amount.

More information on liquidated damages is covered here under para 21.3
http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_PublicNoticesAndInfoSheets&id=HMCE_CL_000513&propertyType=document#P2003_198562

I hope this is helpful.

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