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HMRC’s change of policy on the VAT treatment of compensation and similar payments

HMRC has set out its new policy on the VAT treatment of compensation and similar payments. Historically HMRC took the view that compensation payments were outside the scope of VAT because no supply had been made between the parties involved.

HMRC published Revenue and Customs Brief 12 (2020) in September year following the recent CJEU judgements in MEO and Vodafone Portugal. The Brief has caused concern for landlords in particular as the changes seem to not only affect the VAT treatment of payments made for breach or early termination of contracts but also for damages and dilapidations payments.

The Brief also indicated that the changes to the VAT treatment should be made retrospectively even though HMRC’s previous guidance clearly stated these payments were outside the scope of VAT.

Following a number of representations made to HMRC, they have now updated the Brief to say that they have decided to apply the updated VAT treatment from a future date. They have also said that a new Brief will be issued shortly to explain what businesses need to do. In the meantime, a business can either:

  • continue to treat such payments as further consideration for the contracted supply, or
  • treat them as outside the scope of VAT, if that is how they treated them before the Brief was issued

To discuss how this change may affect your business please get in touch with your PKF Francis Clark contact.

FEATURING: Becky Hayes
Becky advises family businesses, companies and individuals on a broad range of VAT and SDLT matters. Becky’s particular specialisms include land and property, company reconstructions… read more
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