The question of whether VAT is applicable to awards for damages continues to present nuanced challenges. The promulgation of the Value Added Tax (Electronic Invoicing System) Regulations, 2023 (herein after “the Regulations”), effective 1 January 2024, has further underscored the necessity of delineating taxable transactions from non-taxable remedies under contract or tort law.

Regulatory framework

Pursuant to Regulation 4(1) of the Regulations: “A taxable supplier shall issue a tax invoice using an electronic invoicing system to a customer for the consideration paid or payable by that customer."

Regulation 2 defines a “customer” as:

“A person to whom a business supplies goods and services.” A “taxable supplier” adopts the meaning under Section 2 of the Value Added Tax Act, namely:

“a person who is required by this Act to be registered.”

In light of the foregoing, the regulatory scheme mandates that a tax invoice—now required to be generated via an approved electronic invoicing system—must evidence a transaction where (i) goods or services have been supplied, and (ii) consideration, whether paid or payable, exists as the reciprocal obligation from the customer.

Nature of Damages awards

At law, an award of damages typically constitutes compensatory relief, not payment for a supply. It's function is restitutive, premised on the principle of placing the aggrieved party in the position they would have occupied had the breach or wrongful act not occurred. As such, no supply of goods or services arises from the payment of damages, nor is consideration, as understood in VAT jurisprudence, furnished in return.

Accordingly, an award of damages—absent any element of consideration in exchange for a taxable supply—does not satisfy the definitional requirements for issuance of a VAT-compliant electronic tax invoice under Regulation 4(1). Where neither party can be characterised as a “customer ” (i.e., recipient of goods or services), VAT liability does not crystallize.

Practical implications

However, legal practitioners must remain vigilant in dissecting the nature of the award. Where compensation is blended with payments for actual or future supplies such as reimbursement for services rendered or asset transfers, those components may attract VAT. The existence of mixed considerations within settlements or arbitral awards mandates apportionment and separate treatment for VAT purposes.

Conclusion

Damages awarded by a court or tribunal, in and of themselves, do not trigger VAT obligations under the Value Added Tax (Electronic Invoicing System) Regulations, 2023 unless they are intrinsically linked to a taxable supply. The issuance of a smart invoice, as contemplated by the Regulations, presupposes a transactional relationship governed by supply and consideration.