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VAT treatment of court case settlement

  • 15-06-2015 9:42am
    #1
    54and56
    Registered Users, Registered Users 2 Posts: 7,741 ✭✭✭


    Hi all,

    Mr X is a sole trader and provided services to ABC Ltd invoicing them €5,000 + €1,150 VAT = €6,150. Due to a shareholder dispute the main shareholder and MD of ABC Ltd leaves the company and a new MD is appointed. The new MD asserts that the contract Mr X entered into with the previous MD did not follow the internal procedures for approving service contracts set out in the ABC Ltd Shareholders Agreement and is therefore void and ABC Ltd won't pay the outstanding €6,150.

    Mr X initiates court proceedings and eventually ABC Ltd agrees to settle the case by paying Mr X €3,000 in full and final settlement.

    What is the correct treatment of the settlement from a tax (particularly VAT) perspective? Is the €3,000 deemed to be a VAT inclusive amount? Does Mr X simply write a credit note for €3,150 and pay the €561 VAT on the €3,000 he received via the settlement? Does Mr X write off the €3,150 as a bad debt but still have to pay the full €1,150 in VAT to Rev Comm?

    I assume if Mr X's solicitor charges him €1,230 (being €1,000 + €230 VAT) Mr X can offset the €230 solicitors VAT against the €561 or €1,150 he is due to pay Rev Comm?


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