In Owen Francis Saunders v HMRC  TC6992 compensation paid under the Proceeds of Crime Act for shoddy workmanship cancelled out the underlying supply for VAT purposes: effectively there was no supply of goods or services.
HMRC followed up on a Trading Standards prosecution of a tradesman who grossly overvalued building work, leading to his customers being fully compensated by a court ruling.
On appeal, the Tribunal decided that because the court had compensated the victims in full for what they paid, that meant that he had not in fact provided anything of value, and could not have made a supply. Saunders was therefore not over the VAT threshold after all and did not have to register.
For VAT to be due, a supply must have been made. This is a fundamental principle of VAT. This is an interesting case and perhaps an unexpected finding, but the logic is clear. However the finding does not mean that all criminal activity is automatically outside the scope of VAT. Each case is tested on its own merits and the key principle is whether ‘fiscal neutrality’ has been compromised.
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VAT time of supply
The time of supply of goods or services determines the date on which VAT becomes due.