client received damages following breach of contract and out of court settlement - is this receipt VATable now that HMRC's interpretation of the law has changed following the issue of Brief 12 (2020)?
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I'm sure if you asked HMRC they would say yes, but I think it would depend on what the supply was that the contract was for.
https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/va...
Read the link above, it then leads to 4 more links, its a 10 minute read but worth reading because you need to understand the logic of what HMRC are saying, if you make a taxable supply, any breach of contract is likely to be in relation to that taxable supply and therefore compensation follows the same VAT treatment.
If the breach of contract is in relation to some sort of taxable supply (ie, your client is supplying something but is no longer supplying that something because of a breach of contract by the customer), then HMRC would likely consider it taxable.
If the breach of contract was related, say to an employment matter ending with a breach of contract/compensation (ie, repaying training loans after an employee leaves or clawing back a bonus, etc), then that is unlikely to be taxable.
HMRC's view is based on the case law though and the case law relates to, so far as I understand, the provision of services. I think I would take a different view if it was for goods, or even for services of a different and less passive nature than phone contracts, but I'd be interested in your take on it Jason.
Your logic is right, the guidance is around services.
As we know, VAT has different rules for goods and services, and services was the grey area - if you cancel a hotel booking it was originally seen as "not a supply" and so not subject to VAT, likewise cancelling a mobile contract meant you no longer received the service and so it wasn't VATable, but the EU Courts saw it differently, cancelling a contract was still seen as a supply of services.
For goods, there was much less any ambiguity, if you supplied goods and customer didn't pay, you claim bad debt relief, if customer part paid you adjust the output tax, etc.
Nick - could you elaborate on the nature of supply (goods or services) and on the nature of the breach.
many thanks for replies - the original supply was of services by a TV producer to a TV Production company. The producer was paid in full at the time for series 1 but entered into a contract whereby if the series was recommissioned, the producer would be re-engaged to produce series 2. The show was recommissioned but the producer was not re-engaged so the producer appointed a lawyer who duly obtained damages were awarded for breach of contract but out of court.
I have agreed with client it is safer to just account for VAT (which is neutral anyway as both VAT registered) - I do think it represents a change in the application of the law by HMRC though
Just checking - we are looking at this in light of the 25th Jan 2021 update issued by HMRC ?
The 'to be applied from a future date' point. Still waiting for HMRC on this aren't we? Do businesses not have the option as to how to handle the VAT?
https://www.gov.uk/government/publications/revenue-and-customs-brief-12-...
I think you are right - but as my client has already been paid the VAT it is probably safest option to bank it with HMRC rather than repay the customer who may be reluctant or unable to pay a future VAT only invoice