+971 4 4542366 +971 554413566

Flyingcolour logo Flyingcolour logo2

  • Home
  • UAE Company Setup ›

    Business Setup Overview

    • Business Setup Overview of UAE
    • Educate yourself about Jurisdictions in UAE

    Mainland Business Setup

    • UAE Mainland Overview
    • Mainland Professional Company
    • Mainland Limited Liability Company
    • Mainland Industrial Company
    • Mainland Branch/ Representative for Foreign Company
    • Mainland GCC Owned Company

    UAE Mainland

    • Dubai Mainland
      Dubai Mainland Business Setup Overview Business Setup Al Barsha & Tcom Business Setup Al Quoz & DIP Business Setup Al Qusais Business Setup Bur Dubai Business Setup Business Bay Dubai Business Setup Deira Dubai
      Business Setup Downtown Dubai Business Setup Dubai Marina & JBR Business Setup Dubai Media City Business Setup International City Business Setup New Dubai Business Setup Sheikh Zayed Road Business Setup Jumeirah Beach Road & Al Wasal Road
    • Abu Dhabi Mainland
    • Ajman Mainland
    • Sharjah Mainland

    UAE Freezone

    • Freezone Business Setup Overview
    • Dubai Freezone
    • Abu Dhabi Freezone
    • Ajman Freezone
    • Sharjah Freezone
    • Ras al Khaimah Freezone
    • Umm al Quwain Freezone
    • Fujairah Freezone

    UAE Offshore

    • Offshore Business Setup Overview
    • Dubai Offshore
    • Ajman Offshore
    • RAK ICC Offshore
  • Taxation ›

    Taxation

    Expert taxation and financial management solutions

    VAT Services

    Business Accounting Services

    Financial Forecast & Projection

    Book-keeping Services

    Accounts Payable

    CFO Services

    Inventory Verification Service

    Tax Residency Certificate in UAE

    Payroll Management

    Month End Financial

  • PRO Services ›

    PRO Services

    Professional support for all your business needs

    PRO Business Services Overview

    PRO Services

    MEA & MOFA Attestation

    Golden Visa

    Property Visa

    DUBAI Customs Registration

    Assistance in Bank Account Opening in UAE

  • DIFC Formation ›

    DIFC Formation

    Pioneering Excellence in Financial Foundations.

    Overview

    DIFC Foundation

    DIFC Prescribed Company

  • Blogs ›
    • Categories
    • Industries

    About Business

    Building & Engineering

    Educational Activities

    Financial Activities

    Gas & Energy

    Heavy Industries

    Light Industry

    Medical

    Nutrition & Food

    Personal Household

    Print & Media

    Real Estate

    Sports

    Activity Group: Transport

    Various Activities

    Business Setup

    Company Formation

    Dubai Business Laws

    Entertainment & Related

    Freezone Company Formation

    Offshore Formation

    Research Article

    UAE Business News

    Accounting & Bookkeeping

    Business Setup Dubai

    Cloth Pressing Business

    Construction

    Crypto Business

    Decoration Design Business

    Dry Cleaning Business

    Education

    Energy and Mining

    IT

    Financial Services

    Fintech

    Healthcare

    Healthcare Industry

    Hotel and Hospitality

    Home Based Business

    Manufacturing

    Media and Entertainment

    Online Business

    Real Estates

    Restaurant and Cafe

    Shipping

    Telecommunication

    Trading

    Transport

    Travel and Tourism

    Utilities

    Yoga Centre

  • Contact
Calculate Your Business Setup Cost in UAE

Is VAT Applicable On Compensation Type Payments?

  • Home
  • Blog
  • Is VAT Applicable On Compensation Type Payments?
  • Sat 16 Nov 2019 | By : admin
VAT is a tax on supplies of goods and services. In this manner, no VAT is expected if there is no supply. As a major aspect of business arrangements, organizations will frequently make payments to compensate one another for any loss, exclusions or other wrongdoings. A question emerges whether VAT is expected on such payments or not? For the same issue, Federal Tax Authority (FTA) has issued a clarification (VATP001) stating that wherever the payment is not a consideration for supply; no VAT is due on the payment. Let’s discuss in detail: As per VAT law, VAT is applied on taxable supplies of goods and services. Taxable supply is defined in Article 1 of the VAT Law as a “supply of goods or services for a consideration by a person conducting business in the State, and does not include exempt supply”. In order to charge VAT there should be taxable supply; if any payment is not for supply of goods and services then VAT will not be applied. Whether the payment is for supply or not depends upon whether the taxpayer has provided anything in the return of the payment received. Following are some case wise example to understand applicability of VAT in such scenarios; however this is not the answer to all type of payments / situation, applicability of VAT will vary from case to case:
  • Payment for damaged goods: payment for damaged or lost goods to the owner of the goods will not be considered as supply; hence it is out of scope of VAT as it is for the compensation and breaching pre-existing terms of the contract.
  • Payment of fine or penalty: The purpose of fine and penalty is to punish the wrongdoer for the wrongful act. The person imposing fine or penalty for not making any supplies will be out of scope of VAT. Payment for breach of contract or fine or penalty imposed by government authorities is good example for these types of payments.
  • Payment for settlement of dispute: In case of dispute settlement (In or outside the court) and payment as a result of the settlement; VAT may or may not be applicable. It depends on the case.
Is VAT applicable on compensation type payments For example a dispute with regards to the price of goods will be considered as supply and subject to VAT. In case of late payment of contractual consideration, it will be not subject to VAT as there is no supply associated.
  • Payment for use of the rights: If a payment is made in consideration for using any rights to use any property including intellectual property such as patents, copyrights etc. will be subject to VAT as this payment for supply of the rights is for the use of the property.
  • Contractual payments to compensate loss: Such type of payments is outside the scope of VAT as there is no supply involved. For example liquidated damages which are predetermined amount need to pay in result of breach of any contractual obligation such as early termination or late performance. However in case of cessation of any right, VAT will be applicable. For example a guest in hotel is allowed to cancel his booking by paying cancellation charges, such charges will be subject to VAT as the guest ceases his right regardless the hotel room remains available to the guest or not.
To summarize whether or not payment is to be considered for any supply, reasons of the payment need to be determined by reviewing contractual and legal arrangements. It may be necessary to consider whether:
  • The payment is in return for any supply of goods or services previously agreed
  • The payment is in return for any supply of goods or services newly agreed
  • The purpose of payment is to adjust previously agreed consideration for any supply
  • Any transfer of right or promising not to exercise a right between parties in return of payment,
Even the title (Compensation or penalty) of payment will not affect applicability of VAT. In order to determine the applicability of VAT nature of transaction or payment need to be determined Flying Colour Tax Consultant's competent team could assist you in:
  • VAT Consultation
  • VAT Registration, VAT Group Registrations, deregistration and amendments
  • Registration under tourist VAT refund scheme
  • Review of complete procedure and compliance related to VAT
  • Assistance in selection of VAT compliant Accounting Software
  • Timely and Correct Submission of VAT Tax Return (Form VAT201)
  • Timely and Correct Submission of VAT Tax Refunds (Form VAT311)
  • Assistance in preparation of FTA compliant Books of Accounts
  • Assistance in FTA compliant Record Keeping, Documentation and Audit File and many more
This blog post is written by CA. Taher Bohra. Feel free to call our Tax Advisor today for a quality consultation related to your VAT related queries. Please send inquiry to taxadvisor@flyingcolour.com or call +971 4 4542366.

Leave a reply

  • flyingcolourbs
  • 3000+ Real Customer Reviews on Google.

  • Click here to Read.

Recent Posts

DMCC vs JAFZA: Which Premium Freezone Is Best for Your Business?
Mon 19 May 2025
Tax Benefits of DIFC Foundations for Global Investors
Thu 15 May 2025

Contact Us

Our Success

Our Success lies in honestly and integrity which are used as motivational factors to inspire us to arrive at success as well as prosperity for the company plus our customers.

18,000

+

Global Clients

20

+

Years of Experience

175

+

Team of Professional

High Tech


Real Time Support

Ready to take it a step further?

You can schedule a free call with our expert consultants

Do you have questions or want more information ?

Phone : +971 4 4542366

Mobile or Whatsapp : +971 554413566

Email : info@flyingcolour.com

Keep connected

Get updates by subscribe our newsletter

About Us
  • We are a leading consulting firm providing Company formation, Accounting & VAT and immigration services located in Dubai - UAE ...Read more
  • flyingcolourbs
  • 3000+ Real Customer Reviews on Google.
  • Click here to Read.
Popular Services
  • Jebel Ali Offshore Company Setup
  • Business Setup in Dubai Free zones
  • Limited Liability Company
  • Professional Company Setup
  • Bank Account Opening in Dubai
  • Offshore Company Formation
  • Dubai Mainland Company Setup
  • Trade License
  • Miscellaneous
  • Flyingcolour® Careers
Gallery
  • LegalEx Exhibition London – 2018
  • Going Global London – 2017
  • GITEX 2013
  • GITEX 2012
  • Diwali
Quick Links
  • Mainland Company Formation
  • Free Zone Company Formation
  • Offshore Company Formation
  • VAT Registration & Return Filing
  • Economic Activity Guide for UAE
  • VAT Consultancy Services
  • Customer Grievance Policy
  • Terms and Conditions
  • Privacy Policy
Contact
  • Head Office:
  • Office No.2608,2609 & 2610
  • Concord Tower Opposite Palm Jumeirah Dubai Media City,
  • Dubai. UAE.
  • DIFC Office:
  • Unit GV-00-04-03-BC-44, Level 3,
  • Gate Village Building 04, PO Box 84059,
  • Dubai. UAE.
  • payment

©2004 - 2025 Flyingcolour® . All rights reserved