Until recently, HM Revenues & Customs (HMRC) typically took the view that as compensation or damages payments were not consideration for a supply, they were outside the scope of Value Added Tax (VAT). Following two recent EU judgements, HMRC has now reversed this position, so that many compensation payments or early termination fees will now fall within the VAT regime.
HMRC has updated its position as set out in (Revenue and Customs Brief 12 (dated 2 September 2020)(the Brief):
Overall, HMRC have stated that early termination fees will now be considered “as generally liable for VAT”, even in cases where the payments are “described as compensation or damages”. The result of this changing approach by HMRC will mean that most compensation, early termination and cancellation fees will now be considered as payments for a supply, and so will be now liable for VAT.
This change may also have a significant retrospective impact as well. In the Brief, HMRC indicated that anyone who has not accounted for VAT on the above such payments should correct this error. Furthermore, VAT will be payable on any amounts received after the date of this brief, even where HMRC previously ruled that such payments were outside the scope of VAT. The extent to which HMRC will take retrospective action remains to be seen, but taxpayers should be aware of the potential risks they face should they fail to correct any such error.
For more information contact Teifi Warner.