HMRC has announced that it is revising Revenue & Customs Brief 12/2020, and that the updated VAT treatment set out in the brief will apply ‘from a future date’. The brief was published in September 2020 and at that time was stated to apply retrospectively.
According to Brief 12/20, developments in EU case law led HMRC to conclude that many payments described as compensation (and typically treated as outside the scope of VAT) were actually consideration for supplies. As a consequence, HMRC’s said it would treat payments arising out of early contract termination as consideration for a taxable supply. Liquidated damages and payments for breach of contract would also be seen as consideration for a supply. Furthermore, HMRC had said it expected retrospective corrections unless a specific ruling had been obtained from HMRC to state that the fees are outside the scope of VAT.
However, until the revised guidance (which is expected ‘shortly’) is issued, HMRC now says that businesses can either:
continue to treat payments that fall within the brief as further consideration for the contracted supply; or
go back to treating them as outside the scope of VAT, if that is how they treated them before the brief was issued.
Eloise Walker, tax partner at law firm Pinsent Masons, said: ‘Finally HMRC has abandoned its outrageous suggestion that its change of policy could be implemented with retrospective effect. This was especially controversial because the HMRC announcement came out of the blue and the suggestion that businesses should be looking back four years – to a time before the Vodafone and MEO judgments even came out – was particularly unfair and unworkable. Once you have settled a commercial dispute it is seldom possible to go back and ask for another 20% so imposing VAT at a later date was likely to just leave the recipient of the damages out of pocket. This confirmation that the change will not be retrospective at least means that the many contract terminations which took place as a result of the coronavirus pandemic no longer need to be revisited.
‘We are still waiting to hear exactly how much notice HMRC has taken of the outcry over all the situations when its change of practice will apply – particularly in relation to damages for breach of contract, rather than early termination (arguably the former is not covered by the Vodafone and MEO cases) – as its revised guidance has been delayed,’ Walker explained. ‘HMRC has taken some points on board but there are particular concerns in relation to property transactions (which were ignored in the guidance originally issued), especially dilapidation payments under leases,’.
‘Let’s hope that in future before publishing guidance on a fundamental change of practice HMRC will consult first to make sure it has understood the implications of its proposals and that it won’t try to make future changes retrospective,’ Walker added.
HMRC has announced that it is revising Revenue & Customs Brief 12/2020, and that the updated VAT treatment set out in the brief will apply ‘from a future date’. The brief was published in September 2020 and at that time was stated to apply retrospectively.
According to Brief 12/20, developments in EU case law led HMRC to conclude that many payments described as compensation (and typically treated as outside the scope of VAT) were actually consideration for supplies. As a consequence, HMRC’s said it would treat payments arising out of early contract termination as consideration for a taxable supply. Liquidated damages and payments for breach of contract would also be seen as consideration for a supply. Furthermore, HMRC had said it expected retrospective corrections unless a specific ruling had been obtained from HMRC to state that the fees are outside the scope of VAT.
However, until the revised guidance (which is expected ‘shortly’) is issued, HMRC now says that businesses can either:
continue to treat payments that fall within the brief as further consideration for the contracted supply; or
go back to treating them as outside the scope of VAT, if that is how they treated them before the brief was issued.
Eloise Walker, tax partner at law firm Pinsent Masons, said: ‘Finally HMRC has abandoned its outrageous suggestion that its change of policy could be implemented with retrospective effect. This was especially controversial because the HMRC announcement came out of the blue and the suggestion that businesses should be looking back four years – to a time before the Vodafone and MEO judgments even came out – was particularly unfair and unworkable. Once you have settled a commercial dispute it is seldom possible to go back and ask for another 20% so imposing VAT at a later date was likely to just leave the recipient of the damages out of pocket. This confirmation that the change will not be retrospective at least means that the many contract terminations which took place as a result of the coronavirus pandemic no longer need to be revisited.
‘We are still waiting to hear exactly how much notice HMRC has taken of the outcry over all the situations when its change of practice will apply – particularly in relation to damages for breach of contract, rather than early termination (arguably the former is not covered by the Vodafone and MEO cases) – as its revised guidance has been delayed,’ Walker explained. ‘HMRC has taken some points on board but there are particular concerns in relation to property transactions (which were ignored in the guidance originally issued), especially dilapidation payments under leases,’.
‘Let’s hope that in future before publishing guidance on a fundamental change of practice HMRC will consult first to make sure it has understood the implications of its proposals and that it won’t try to make future changes retrospective,’ Walker added.
