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vat on compensation

i have a client who has received a compensation payment from the water board for loss of takings

i am not clear whether this receipt should be subject to vat or whether it is outside the scope

any help or advice would be useful


Martyn Scott Thacker


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By Anonymous
11th Aug 2005 14:06

I may very well be wrong
My logic is basically as follows:
With insurance, there are premiums paid (no VAT).
The insurance payout received is usually related to some kind of damge to something, as is Water Board compo from e.g. flood damage.
But this is compensation for loss of takings, does it not therefore count the same as actual takings?
Like I said I may very well be wrong.

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By Anonymous
09th Aug 2005 19:01

No supply = no output VAT
In my view as the trader has made no supply there is no output tax due.

By contrast, a few years ago when gun laws changed, an chance unintended opportunity arose for HMC&E & the Government to impoverish the gun dealers.

It worked like this : gun dealers had to surrender now newly-outlawed certain categories of firearms. They were compensated for the value of surrendered, to be destroyed, firearms. Value of supply = clearly nil (no market value as unlawful to sell). Presumably compensated at cost ex VAT. So receive compensation & thought to be VAT-free as "compensation".

However, HMC&E managed to convince the Courts that the gun dealers made a supply - as goods physically passed from the gun dealers to the government. The gun dealers consequently had to pay Output tax on a "supply" !

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By Anonymous
10th Aug 2005 13:57

I would disagree. If the lost takings would have been vatable then won't the compensation, which is money recieved through the course of trade, be vatable too?

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By Anonymous
11th Aug 2005 13:49

Not yet seen any VAT on compensation
I've not yet seen any VAT charged / accounted for on compensation.

If VAT was accounted for on compensation, then wouldn't the payer of compensation request a VAT invoice so that they could reclaim it as input tax ? Maybe for peace of mind the matter should be taken up with the Water Board.

If an invoice were issued what would go on it ?
Not goods - no goods supplied.
Not services - no services supplied - unless "not opening" is adjudged to be a supply of a service ?

I remain convinced : no supply = no outputs = no output tax.

When an insurance claim is made the compensation (claim) received would normally be ex VAT if the trader is VAT registered.

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By Anonymous
12th Aug 2005 13:54

Loss of trade compensation = not a supply
Tolleys VAT handbook 2004 first edition at page 1032 quotes the following example :-

"A local authority dig up a pavement in front of a parade of shops. Compensation for loss of trade sufferred as a result of its action paid by the local aythority to a shop-keeper would not be regarded as a taxable supply."

It goes onto say :-

"However, if a shop business was paid by the local authority to allow it to work on its land, the payment would be consideration for a taxable supply."

This confirms the principle that for there to be VAT due, something has to be provided to a customer - ie. no supply = no VAT.

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