Reporting and tax liability are the cornerstone of any accountant. However, the inclusion or non-inclusion of certain amounts in tax liabilities depends on the decision of the accountant. Therefore, it is necessary to clearly understand which amounts are income, which amounts are subject to value added tax (hereinafter – VAT), and which amounts should not be included.
Quite often, businesses file lawsuits to protect their violated rights. Based on the results of the case, one of the parties receives a decision in their favor and the right to collect fines and compensatory amounts: fines, penalties, inflation losses, interest for the use of other people’s money, lost profits, etc. In addition, in accordance with procedural rules, the amount of court fees paid is subject to recovery from the defendant in case of satisfaction of claims.
So let’s try to answer the following questions:
- Is the compensation of the court fee by the other party according to the court decision subject to VAT?
- Are the fines and compensatory amounts collected by the court subject to VAT?
- Is the amount of contractual debt that is not paid voluntarily, but on the basis of a court decision subject to VAT?
In order to give a final answer to these questions, we turn to the rules of tax law. First of all, you need to determine what is the supply of goods and services. To do this, refer to paragraphs 14.1.185 and 14.1.191 of the Tax Code. The above rules should be analyzed in conjunction with paragraph 185.1, which states that the object of VAT taxation are transactions in particular for the supply of goods and services. As the refund of the previously paid court fee does not fall under the signs of supply of goods or provision of services, accordingly, there is no obligation to pay VAT on the amounts of the court fee collected based on the results of the court proceedings.
Regarding fines and compensatory amounts, it is worth referring to paragraph 188.1 of the Civil Code of Ukraine, which states that the contractual (contractual) value does not include the amount of penalties (fines and / or penalties), three percent per annum of overdue amounts and inflation costs, damages , including compensation for lost profits by decisions of international commercial and investment arbitrations or foreign courts received by the taxpayer due to non-performance or improper performance of contractual obligations.
In view of the above, it can be concluded that the amounts of penalties and compensatory penalties are not subject to VAT, and the principal amount of debt (for example, the value of goods delivered but not paid for) is subject to VAT.
Please note that in case of doubt about the presence or absence of the object of taxation in each case, the need to include or not to include certain amounts in tax liabilities, we advise you to use the services of practicing accountants and lawyers. They will help to obtain individual tax advice (IPA) from regulatory authorities, which will protect against excessive tax burden.