Settlement Agreements – Have You Considered The VAT Implications?

It is common for contracting parties to enter into a settlement agreement to settle a contractual dispute. this is often the preferred route where parties want to settle a dispute expeditiously and eschew the financial and time implications of taking a matter to court. Typically, a settlement agreement would involve one party (Party A) paying another party (Party B) in full and final settlement of the dispute. A feature of settlement agreements (to ensure that the dispute is "over"), includes a clause that states that Party B, in return for the payment made by Party A, would release Party A from any and all claims Party B has against Party A.

Where both parties are VAT registered, the VAT consequences of the settlement agreement must be evaluated prior to the parties ratifying such agreement. This begs the question as to whether the payment made by Party A to Party B in order to settle the dispute, comprises "consideration" for a supply made by Party B. If the