VAT Alert – Confirmation of Change in VAT Treatment

HMRC last week confirmed their position on the VAT treatment of Contract Termination & Compensation payments, following recent judgments of the Court of Justice of the European Union (“CJEU”),  in particular the Vodafone case which concluded earlier in the summer.

The new guidance can be found here

The impact is potentially quite significant and may also have retrospective effect, in summary:

  • Previous HMRC guidance (and their own internal manuals) stated that where customers are charged to withdraw from contractual agreements to receive goods and/or services, these charges were not generally for a supply for VAT purposes and, therefore, were outside the scope of VAT.
  • However, the new guidance confirms HMRC’s updated position in that; “it is evident that these charges are normally considered as being for the supply of goods or services for which the customer has been contracted for” and therefore should be subject to VAT.
  • This potentially means that, most early termination and/or cancellation fees will be liable for VAT, even if they are described as compensation or damages in the contract.

There is likely to be discussions about whether HMRC seek to apply this retrospectively which could create a potential exposure for businesses and uncertainty regarding how far back they can reasonable expect adjustments to be made. We will provide further updates as relevant, but we would certainly suggest that businesses had a reasonable expectation to rely on the previous guidance and we would encourage HMRC to conclude that any changes should only apply going forward.

In the meantime, it may be worth reviewing existing arrangements to understand the impact of the changes. Our VAT Team would be happy to discuss the impact of this guidance in further detail with you.

VAT Grouping – Call for Evidence

HMRC have invited responses by 20th November 2020, seeking views and evidence on how the current VAT grouping provisions operate in the UK, together with some potential changes. The changes cover establishment and compulsory grouping.

To information to call for evidence can be found here

We would be happy to discuss this further with you and submit any responses to HMRC on your behalf. For those clients currently operating a VAT group registration or considering a change to their VAT registration position, it will be important to review any changes that are announced in due course.