Each party shall be responsible for its own taxes arising in connection with the performance of this Agreement, except that the Client shall be responsible for any value added tax chargeable on the supply of the Services by the Consultant under this Agreement.
Here is a plain English explanation of the suggested Taxes clause:
This clause deals with tax obligations and liabilities under the contract.
It states that generally, each party must pay any taxes they incur related to the contract.
However, value added tax (VAT) on the Consultant's services is treated differently. The Client must pay the VAT on those services.
So in summary:
- Each party pays their own taxes on the contract, apart from VAT.
- The Client is responsible for paying the VAT on the Consultant's services.
The purpose is to clarify tax liabilities, avoiding potential confusion. It places VAT payment on the recipient of services rather than the provider.
This ensures the Consultant receives their full fees as agreed, with the Client responsible for discharging the VAT element. It aims to prevent disputes over tax obligations in relation to the services.
Tax liability clauses have a long history in contract law dating back to Roman times.
As taxes became more prevalent in the Middle Ages, contracts began to address tax obligations between parties. At first this was handled through implied terms and custom.
By the 17th century, English courts had established precedents handling tax liability in contracts under common law principles. But uncertainty remained regarding which party bore responsibility for taxes in various situations. Explicit tax clauses emerged to provide clarity and prevent disputes.
In the 19th century, complex tax regimes like the British Stamp Act made detailed tax liability terms essential in major commercial contracts. The rise of value-added taxes in the 20th century further increased the importance of contractual tax apportionment.
As international business grew, differences in national tax laws made tax liability allocation even more crucial in cross-border contracts. The emergence of complex taxation on intellectual property and services revenue also drove detailed tax clauses covering diverse transaction types.
Today carefully crafted tax liability provisions are seen as essential in most complex commercial agreements. They aim to provide certainty, allocate responsibility appropriately, and avoid unintended tax burdens that could undermine the economics of a deal.
As tax laws continue to evolve, clear tax liability clauses in contracts are critical to prevent costly disputes between parties.