i have received reply for my previous post which have been really helpful in clarifying my confusion. i am very happy to come across this forum and i believe this forum is one of the very few on-line forums which are actually very useful. i would like to thank everyone for taking the initiative to maintain such a resourceful website.

I am doing a vat return at the moment for a restaurant. i have successfully categorized all the purchase and expenditures but i am quite confused about the following issue:

the restaurant mentioned above had to pay a fine to an advertising firm due to breaking a contract. i have not encountered such situation before. what category of expense should it fall into? and what will be the impact on the vat return?

thank u in advance.

If the fine is by way of compensation for breach of contract, I would say that the payment is Outside the Scope of VAT, as there is no supply.  Therefore it is ignored altogether for VAT Return purposes.

thank u for helping me. i really appreciate that.

so for the time being i can ignore it in the vat return. but when im bookkeeping for the annual accounts should i treat this fine as sundry expense?

yes the fine should be treated as a cost in the annual accounts