I understand Delay damages are exempt from VAT, i.e. VAT is chargeable on the value prior to the delay damages being deducted, but does the same principle apply to Pain share (which is a deduction from the Contractor for which he has paid VAT on the services/goods already paid out in completing the works)
Hi, the starting principle is that you pay VAT on any service provided which attracts VAT. Damages are not a service and therefore you do not pay VAT on damages (this has been answered previously)
The question you ask is really does the return of money under the pain share amount to a VATable service. This seems unlikely. What it will do however is reduce the value of the services provided on which VAT has already been paid so the contractor will have over claimed and the Employer overpaid. This needs a reconciliation.
To look at an example, if the value of works was 100, VAT of 20 would have been claimed and paid. If the pain share reduced the value to 80 then the VAT should be 16. I think then the Contractor returns the 4 (being the over claimed VAT) to the Employer and claims back any balance from the Revenue when completing its VAT return.
However, VAT can be a funny area and you should take express advice in any factual scenario and/or get confirmation from the Revenue.
Thanks for answering that one !