Again, why is VAT being charged when HMRC guidance is clear. I'd call them out on it. I've reviewed the HMRC website and it is clear VAT should not be charged on a settlement where there is no supply of taxable goods.
http://www.lawgazette.co.uk/news/vat-settlement-disputes-0This website sums it up quite well, it is dated 1992 but I have reviewed the HMRC website and this is still currently valid. If there has been a change in law then I cannot find it and I'd ask Simons Muirhead & Burton to clarify.
I would post the HMRC link but their website breaks up that summary into various pages.
Here is what is states:
"Press notice 82/87
The press notice had been issued with the object of restricting its application to genuine disputes only. If a settlement agreement was worded in terms that the plaintiff was giving up rights to sue the defendant in exchange for a sum of money, this was not a supply."
Don't the Getty letters state that in return for payment they are giving up their right to sue?
It goes on to state:
"Payment by way of compensation in respect of a past transgression was outside the scope but payment in consideration of allowing the future use of the copyright material was in respect of a taxable supply."
The bottom line is there should be no VAT payable on these settlements and the only reason they would want to charge VAT is to balance off against their VAT expenditure in the hope of claiming it back.
If they are trying to agree a price for past use so that it becomes a sale they should not be threatening any legal action if you don't pay. Imagine walking into a shop, picking up a pair of shoes to look at and then being told if you didn't buy them they'd sue you.
If they confirm that it's not a settlement but a debt, then normal debt laws apply (not that a debt exists) which they've breached several times already and you can complain to the OFT.