In September 2020, HMRC announced an update to its guidance on the VAT treatment of early termination fees compensation payments and liquidation damages.
Historically the HMRC guidance was that contractual compensation payments that were designed to compensate a party in the event of an early termination of a contract fell outside the scope of VAT. The original guidance acknowledged the difficulties in determining whether a payment is compensatory or forms part of the consideration for a supply.
Following the recent decisions of the CJEU in Vodafone Portugal (Case C-43/19) and the decision in Meo (C-295/17) HMRC has now updated its VAT manual and published a brief that states payments are no longer VAT exempt and will be treated as consideration for taxable supply.
You can find more detailed information on these updates in the VAT manuals
Who this affects?
These updates are applicable to businesses that have contracts with customers for minimum commitment periods and customers are subject to termination fees for withdrawal.
Businesses need to consider if any VAT that should have been charged can still be recovered from customers. They should also consider if any payments which have been treated as compensation outside the scope of VAT can now recover VAT that should have been treated as included in the initial payment.
GM&Co suggest seeking specialist advice and one of our taxation specialists would be available to answer any questions you may have please contact us on 0121 550 8509 or email email@example.com.