Major VAT Alert – Changes to HMRC’S treatment on VAT and Compensation Payments
Only last month we were considering the VAT implications of Lease Variations in a newsbyte and now we can report that HMRC has issued a Revenue and Customs Brief (RCB12) on a change of VAT interpretation on areas including:
- Compensation Payments
- Liquidation Damages
- Payments for Breach of Contract
Whereas Compensation payments would have been considered as outside the scope of VAT, because of EU cases, HMRC now consider them to be a payment for a supply.
Liquidated damages are also regarded by HMRC as consideration for a supply and breach of contract payments as further consideration for a supply.
Basically, all are now brought into the VAT arena. HMRC see that payments arising out of early contract terminations are consideration for a taxable supply.
What is a further worry is that the brief states that “any taxable person that has failed to account for VAT to HMRC on such fees should correct the error”. This is not just a prospective change therefore from a current date – 2 September 2020 – but could have significant retrospective impact for those affected. One line of protection would be if you have a written ruling from HMRC on a past situation which covers this aspect.
We currently don’t see that this affects the earlier discussion specific to lease variations but clearly a detailed understanding of what is occurring when disputes or contractual changes in any area arise is needed from the VAT perspective.
For those involved in property management or legal disputes where such issues may have arisen this is certainly an area of real concern for past agreements and certainly something that needs active consideration for settlements in the future.
Get in touch with your usual Centurion VAT contact should you need advice or use email@example.com to make contact.
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