HW Legal
Should you claim the amount including VAT or excluding VAT? There is a simple rule that will help you determine the correct approach.
Including VAT or excluding VAT?
The claimant is a VAT payer and brings a claim seeking payment of a monetary amount. Can the claimant successfully recover VAT as part of the claimed amount?
The answer is yes—but only where the payment awarded by the court is itself subject to VAT.
For example, if a claimant who is a VAT payer brings a claim for lost profits, the court will not award the portion of the claim corresponding to VAT.
Even if the claim succeeds, the court will not award “profit” in the strict sense. Lost profits constitute a form of damages, and damages are not subject to VAT under Section 2(1) of the Czech VAT Act. Accordingly, they do not constitute a taxable supply for VAT purposes.
If the court dismisses part of the claim because VAT was incorrectly added, the claimant will be only partially successful in the proceedings. This may result in a reduced recovery of legal costs and make the litigation more expensive for the claimant.
As a general rule, legal costs are allocated according to each party's degree of success in the proceedings.
When should you claim the amount including VAT?
In what situations may a claimant add VAT to the claimed amount and seek payment inclusive of VAT?
For example, where the claimant seeks payment of the agreed purchase price under a sale contract and the goods supplied are subject to VAT.
A simple rule
Before adding VAT to a claim, ask yourself the following question:
If the defendant pays the claimed amount, will I be required to account for VAT on that payment?
- If the answer is yes, you will generally claim the amount including VAT.
- If the answer is no, you will generally claim the amount excluding VAT.
This distinction can significantly affect both the amount awarded by the court and the allocation of legal costs.
(For those interested: Czech Supreme Court judgment, Case No. 29 Cdo 3321/2020, dated 29 September 2022.)