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VAT - Changes to payments previously seen as compensation


In September 2020 HMRC issued the now “infamous” brief 12/20 which “reset” HMRC’s views as to the VAT treatment of payments previously been seen as compensation and outside the scope of the tax now being taxable.

The infamy was in HMRC’s decision that this was to be implemented retrospectively (even though all HMRC’s advice was that such payments were outside the scope at the time).

This created a huge backlash from the profession and HMRC withdrew the guidance in January 2021 to “review”. Now over a year later HMRC have issued new guidance.

This confirms HMRC’s view that most early termination fees and cancellation fees are liable for VAT if the goods or services for which the fees have been paid are liable for VAT, even if they are described as compensation or damages.

What’s different is that the change in the VAT treatment will now take place from 1 April 2022, so is not retrospective.

HMRC says that the main impact of the revised policy is that fees charged when customers terminate a contract early will be regarded as further consideration for the contracted supply. For example, if a customer is charged a fee for exiting a mobile phone contract early, or if they terminate a car hire contract early, it will be liable for VAT.

Although HMRC says that they will continue to treat dilapidations as compensation, if this is part of the lease or the lease contains details of how such payments may be calculated, etc. this may be seen by HMRC as subject to VAT.

If you have any questions please contact Ian Marrow .

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