No retrospective effect for revised VAT treatment of early termination fees and compensation payments

In September 2020, HM Revenue and Customs (HMRC) published Revenue and Customs Brief 12 (2020) announcing it had changed its view of the VAT treatment of certain early termination fees and compensation payments with retrospective effect.

We engaged with HMRC on this retrospective element, alongside other professional bodies and trade associations, because it had caused particular concern for members whose clients may have been hit with unexpected tax bills as a result of following previous HMRC guidance.

HMRC has now decided that its revised view of the VAT status of relevant payments will not be applied retrospectively.

Our view

We welcome HMRC’s announcement, which was published on 25 January 2021.

It says that it will issue revised guidance, and a new Revenue and Customs brief to explain what businesses need to do, shortly.

What this means for businesses

HMRC says that this expected new guidance will include guidance on what businesses should do if they have already changed how they treat such payments because of the September 2020 brief.

Until that guidance is issued, businesses can either:

  • continue to treat relevant payments 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 revised guidance was issued

Next steps

We continue to engage with HMRC on aspects of their revised approach.

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