VAT and compensation – the next (and final?) chapter
VAT and compensation – the next (and final?) chapter
General HMRC approach from 1 April 2022
On 7 February 2022, HMRC published what appears to be a definitive policy position on the VAT treatment of compensation and termination payments that will apply from 1 April 2022. Businesses should make sure that they understand how the new rules affect them and ensure that their systems and contracts are adapted so that they are compliant by 1 April 2022.
HMRC has clearly listened to feedback (including from BDO) in adjusting its views on such payments and its February 2022 policy stance is more nuanced than the broad approach set out in its September 2020 and January 2021 guidance. HMRC has arrived at a position that many payments are, in all economic reality, extra consideration for the contracted supplies (ie taxable, exempt or zero rated depending on the underlying contract).
However, HMRC considers that payments that are ‘punitive’ in size may, in some circumstances, be treated as compensation (i.e. outside the scope of VAT). While this is a fairer approach than HMRC’s September 2020 policy, it means that the complex nature of such payments does need to be considered carefully: it won’t always be simple to decide if VAT will be due on a payment.
As HMRC guidance has changed over time, companies should review how they have approached the VAT treatment of such payments over the past few years and whether corrective action is now appropriate.
BDO Comment
It is important to appreciate that this ongoing issue does not involve any new law, which under UK and European retained law does not specifically address what is not subject to tax. It is HMRC’s policy and the nature of business is that there may still be a number of receipts where differing views apply as to the VAT position. The Courts also will take a view when they see disputes and almost always ignore any HMRC policy when deciding matters. Therefore, whilst it is good that we have a clearer understanding of HMRC’s position, this is unlikely to be the end of this matter.
Getting help
For further advice – please contact the local member of our VAT and Customs team:
- Scotland - Pauline Davidson
- Midlands, Yorkshire and North East - Lyndon Firth
- North West - Richard Hogg
- Midlands - Juliet Wallwork
- Thames Valley and South West - Glyn Woodhouse
- South East - Kamal Kataria
- Southampton - Sarah Paul
- East of England - Richard Dalton
- London - Tom Kivlehan
Visit BDO's dedicated VAT and Customs pages here.
Visit our Rethinking the region hub and read more guidance from BDO specialists in your area.