On 10 September 2020 we explained HMRC’s revised view on fees paid on contract cancellation and terminations, as set out in Revenue and Customs Brief 12/2020. The shocking point was that the change in VAT treatment was to be retrospective to cover payments made in the last four years.
There was a lot of push-back from businesses and VAT specialists about this change in practice, and now HMRC has reversed its position. It has reissued Revenue and Customs Brief 12/2020 that now says the change in VAT treatment will apply from a date in the future, which has yet to be defined.
This leaves businesses with no clear guidance at all.
HMRC now say that if the previous policy (of the business) was to treat the payment to end the contract as outside the scope of VAT, then that treatment can be followed. Alternatively, if the business wants to treat the contract cancellation payment as further consideration under the contract, that’s fine too.
It’s a mess, and there is no HMRC ruling to say a particular payment should be treated in the same way by the customer and the supplier. We expect there to be further HMRC guidance issued very soon on the VAT treatment of payments for dilapidations, which are often made when a property lease comes to an end. Watch this space.Written by the Tax Advice Network