Readers' forum : Compensation paid

My client (A) was in dispute with one of their customers (B). The claim by B was that A had misled them on their position as the sole importer into the UK of a product that A was selling on to B.

As a result B stopped paying an outstanding debt of about £150 000 to A and said they had been over-charged. A took legal advice and counter-claimed. After mediation B backed down apologised and paid £200 000 to A.

My query is whether VAT is payable on the surplus receipt of about £50 000?

My research indicates that the compensation element is outside the scope of VAT. However my slight concern is that part of the compensation was to cover A’s legal fees of about £20 000 plus VAT. Should that part of the compensation be VATable?

To summarise would it be in...