Termination payments can be made to compensate a supplier arising out of an early contract termination or settled claims for breach of contract, liquidated damages, cancellation fees, early upgrade fees and the like, regardless of whether these payments are described as compensation or damages.

In September 2020 HMRC released a business brief 12/20 which, further to an CJEU ruling, changed the above payments from being regarded as compensation and outside the scope of VAT to being those of further consideration for a supply and taxable. This was to be introduced with retrospective effect over the last four years.

Following discussions with businesses and their representatives HMRC has now agreed not to introduce these changes with retrospective effect and the change in liability will in fact apply from a future date. Revised guidance is now being prepared in the form of a new Revenue and Customs brief as well as HMRC guidance and these will be released shortly.

• Until that guidance is issued businesses can either:
• continue to treat such payments as further consideration for the contracted supply

go back to treating them as outside the scope of VAT, if that is how they treated them before this brief was issued
Hopefully the revised guidance will address the implications for the real estate and construction sectors for which this is especially relevant. However, the change will also impact anyone who charges their customers to withdraw from agreements to supply goods or services.

Read the full government update here.

For VAT support and advice, contact our VAT team at VAT@geraldedelman.com.