Readers’ forum: Is VAT claimable on compensation payment?

One of my clients is a sole trader builder who did a £50 000 building job on a private house back in 2021 working for the homeowners directly.

The job was only partly finished and there have been many problems since which have involved both legal and surveyor costs to identify the problem. My client wants to bring the matter to a conclusion as soon as possible and admits he was at fault for not doing the job properly and has agreed to pay £36 000 to the homeowners and they will pay their chosen builder £30 000 plus VAT to correct the defects.

My question is whether my client can claim £6 000 of input tax on the payment even though the builder will be acting for the houseowner rather than my client? The homeowners have refused to have any further dealings with my client...