Legal settlement taxation for company

mrcheez

Assume you win an amount in a legal case settlement for money owed to your company (assume a settlement of 70% of owed amount).

Is the entirety taxed and liable for VAT or do you first deduct the legal expenses and then treat the rest as taxable income?

Lenar3556

VAT on the money collected is a separate matter. The fact that you had to chase them through the courts is unfortunate, but it doesn’t change the VAT treatment of the moneys collected.

JVince

The vat on legal fees is rebateable.

So if the debt was 10k incl vat and legal fees were 1k + vat and settlement was 7k, the real settlement was 5691+vat (assuming supply at 23% to the debtor), deduct 1k legal fees even though the bill is €1230) and your "real" settlement is 4691 for a 8130 (+vat) debt

Lenar3556

The legal fees are an allowable expense, no different than oil to heat the office, or paper for the printer. Vat can be reclaimed on all of these supplies.

But the 70% settlement from this client doesn’t get any special vat treatment. It’s exactly the same as someone walking in off the street and buying the same value of goods or services and paying for them on the day.

mrcheez

The legal fees are being paid separately, so the settlement is being received in totality.

So 23% of this settlement is treated as VAT correct?

nompere

https://www.boards.ie/discussion/comment/122419549#Comment_122419549

If you raised an invoice for (say) €50,000 plus VAT of €11,500, and accounted at that time for the VAT to Revenue, because you pay your VAT on the invoice basis, then anything you recover through the courts is yours, and you owe no VAT. On the other hand, if you account for VAT on your cash receipts, then what you recover is VAT inclusive, and you must pay Revenue their proportion.

mrcheez

Yep, only pay VAT on payments actually received