VAT or not.....
Discussion
Could do with some help on this one....
We are VAT registered business (UK).
We supplied a large quantity of a zero rated raw material to a UK VAT registered company in order for them to make our zero rated finished product which we then sell onwards.
Unfortunately, the production process hit a snag and the raw material was wasted. The company are happy to compensate us for the loss of the raw material (at cost) and I need to send them an invoice for this.
Would I charge VAT on this compensation amount. We aren't as such selling them the raw material and it isn't linked to any supply of a service.
Our accountant thinks we should charge VAT, but the company I am invoicing thinks no VAT should be charged (which I think I agree with).
Thoughts?
We are VAT registered business (UK).
We supplied a large quantity of a zero rated raw material to a UK VAT registered company in order for them to make our zero rated finished product which we then sell onwards.
Unfortunately, the production process hit a snag and the raw material was wasted. The company are happy to compensate us for the loss of the raw material (at cost) and I need to send them an invoice for this.
Would I charge VAT on this compensation amount. We aren't as such selling them the raw material and it isn't linked to any supply of a service.
Our accountant thinks we should charge VAT, but the company I am invoicing thinks no VAT should be charged (which I think I agree with).
Thoughts?
Simpo Two said:
Doofus said:
Essentially, you are selling them the raw material, becaue they used it for something other than to make your product.
Company A sells raw material to Company B. Company B makes it into a product that Company A then buys and resells. So Company A has two products.VAT rules are a nightmare at times. The items below probably cover it:
https://www.pinsentmasons.com/out-law/guides/vat-s...
https://www.taxadvisermagazine.com/article/compens...
https://www.gov.uk/hmrc-internal-manuals/vat-suppl...
I'd imagine it'll depend on your contract and why the payment to you is required. This is where you take your accountant's advice and rely on their PI cover if it goes wrong.
https://www.pinsentmasons.com/out-law/guides/vat-s...
https://www.taxadvisermagazine.com/article/compens...
https://www.gov.uk/hmrc-internal-manuals/vat-suppl...
I'd imagine it'll depend on your contract and why the payment to you is required. This is where you take your accountant's advice and rely on their PI cover if it goes wrong.
alfabeat said:
We don't sell the raw material to Company B. We provide that. They charge us for producing the final product, which is a vatable supply.
That’s the second of the two ways to characterise the relationship. In this instance, the contractor (the other company) has failed to provide the contracted services. In so failing, they have destroyed the material you supplied to them.
In that case you have a complete defence to their claim for payment for the services that they failed to provide, and you (at least in principle) could have a claim for consequential loss. This could include reimbursing you for the value of the wasted raw material. That would be a compensatory damages claim.
From here: https://www.pinsentmasons.com/out-law/guides/vat-s...
“HMRC’s 2022 guidance
Revenue and Customs Brief 2/22, replacing Brief 12/20, confirmed that intra-contract termination payments and payments under settlement agreements should follow the VAT treatment of the underlying contract. Broadly, therefore, compensation payments to suppliers are liable for VAT if the goods and services for which fees were paid under the underlying contract were liable for VAT.”
As the other company was never paying your company for the lost raw materials, there was never a VATable supply of goods by you to them. On the contrary, the VAT supply was of services *to* you. I can’t see how the compensation for destroying those raw materials is linked to an underlying contract in which the other company would be paying VAT to your company.
So no VAT on the value of the lost raw materials.
Why does your accountant say otherwise?
BlackTails said:
That’s the second of the two ways to characterise the relationship.
In this instance, the contractor (the other company) has failed to provide the contracted services. In so failing, they have destroyed the material you supplied to them.
In that case you have a complete defence to their claim for payment for the services that they failed to provide, and you (at least in principle) could have a claim for consequential loss. This could include reimbursing you for the value of the wasted raw material. That would be a compensatory damages claim.
From here: https://www.pinsentmasons.com/out-law/guides/vat-s...
“HMRC’s 2022 guidance
Revenue and Customs Brief 2/22, replacing Brief 12/20, confirmed that intra-contract termination payments and payments under settlement agreements should follow the VAT treatment of the underlying contract. Broadly, therefore, compensation payments to suppliers are liable for VAT if the goods and services for which fees were paid under the underlying contract were liable for VAT.”
As the other company was never paying your company for the lost raw materials, there was never a VATable supply of goods by you to them. On the contrary, the VAT supply was of services *to* you. I can’t see how the compensation for destroying those raw materials is linked to an underlying contract in which the other company would be paying VAT to your company.
So no VAT on the value of the lost raw materials.
Why does your accountant say otherwise?
Very useful - thank you for taking the time.In this instance, the contractor (the other company) has failed to provide the contracted services. In so failing, they have destroyed the material you supplied to them.
In that case you have a complete defence to their claim for payment for the services that they failed to provide, and you (at least in principle) could have a claim for consequential loss. This could include reimbursing you for the value of the wasted raw material. That would be a compensatory damages claim.
From here: https://www.pinsentmasons.com/out-law/guides/vat-s...
“HMRC’s 2022 guidance
Revenue and Customs Brief 2/22, replacing Brief 12/20, confirmed that intra-contract termination payments and payments under settlement agreements should follow the VAT treatment of the underlying contract. Broadly, therefore, compensation payments to suppliers are liable for VAT if the goods and services for which fees were paid under the underlying contract were liable for VAT.”
As the other company was never paying your company for the lost raw materials, there was never a VATable supply of goods by you to them. On the contrary, the VAT supply was of services *to* you. I can’t see how the compensation for destroying those raw materials is linked to an underlying contract in which the other company would be paying VAT to your company.
So no VAT on the value of the lost raw materials.
Why does your accountant say otherwise?
Simpo Two said:
Doofus said:
He didn't say he sold the raw materials to his supplier. I assumed they were free-issued.
Ah. He said 'supplied'; normally when one company supplies something to another company it's not free.Gives, that's the word
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