HMRC VAT Update – Early Termination Fees & Compensation Payments

It’s a compensation payment – so no VAT applies?

Is a question that we are often asked and the answer starts with “Well it depends….”

Quite often we find that, actually, the payment being made is linked to an earlier supply which was subject to VAT. Therefore, it can be difficult to break the link between the supply originally made and the payment later received, in order to treat the later payment as “outside the scope” of VAT.

HMRC have clearly held the same concern and, supported by recent case law, they had announced – as previously commented upon in our news pages HERE - their intention to regard most termination fees and compensation payments as further consideration for the original supply to which the contract related.

Effectively these payments are now more likely to be seen as contractual penalties and integral to the original agreement between the parties and therefore form part of the consideration payable under that agreement.

As this change of view by HMRC is simply a change of interpretation of the law – as opposed to a change on the law itself – HMRC’s initial position was that this revised VAT treatment should always have applied. However, after HMRC sought feedback from industry, this policy update was issued on the 25th January to announce that the change will not be applied retrospectively. Businesses will still have to consider its impact on the future of course.

The policy note is HERE – and if having read it you have any questions do remember that when VAT gets complicated Centurion are here to help.

For the avoidance of doubt, the content recorded in this news article does not constitute formal advice and we do not guarantee the accuracy of any information provided at the time of reading. It is always recommended that you seek professional advice before acting on any of the news articles or information included.