HMRC guidance: Compensation and early termination
HMRC has issued new guidance that confirms it will now generally see compensation and early termination fees as subject to VAT.
Recent developments in EU case law have led HMRC to conclude that a lot of payments described as compensation (and typically treated as outside the scope of VAT) are actually consideration for supplies. Consequently, HMRC’s policy is now to treat the following as consideration for a supply (where previously (ii) and (iii) below were explicitly stated to be outside the scope of VAT):
- Payments arising out of early contract termination;
- Liquidated damages; and
- Payments for breach of contract.
Worryingly, HMRC states that ‘any taxable person that has failed to account for VAT to HMRC on such fees should correct the error’. It appears that retrospective corrections are therefore expected unless a specific ruling has been obtained from HMRC to state that the relevant payment is outside the scope of VAT.
