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HMRC U-turns on contract termination fees

HMRC’s sudden change in VAT policy in Brief 12/2020 had retrospective effects and contradicted existing HMRC guidance. This was just “not cricket” according to Neil Warren, who is pleased the policy has been reversed.

5th Feb 2021
Independent VAT Consultant
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HMRC has listened

HMRC announced a major chance of policy for the VAT treatment of termination fees and compensation payments on 2 September 2020, in Brief 12/2020, but it has now reversed that change and confirmed that the policy will be introduced “from a future date.”

Fortunately, HMRC has listened to the energetic protestations and well-formulated arguments made by leading tax and accounting bodies, including the CIOT and ATT.

First policy change

For comments and analysis concerning HMRC’s original announcement in R&C Brief 12/2020, see VAT: Sudden change in supplier termination fee treatment.

The key outcome of this policy change was that most termination fees and cancellation payments were deemed by HMRC to be VATable if they related to standard rated contracts, such as the fees paid by mobile phone users to cancel their contracts early. Those charges were previously accepted by everyone in the tax world as being outside the scope of VAT (no supply of goods or services), including in the guidance published in HMRC’s internal VAT manuals.

Unfair to be retrospective

An alarming part of the September 2020 announcement was that HMRC stated that the policy change was to be retrospective. It expected businesses to go back four years and account for output tax on past fees. In my mind, this was unacceptable and definitely “not cricket”.

However, the latest announcement on 24 January 2021 has completely reversed the September version of Brief 12/2020, confirming that the new rules will be introduced in the future, ie no retrospective adjustments are needed.

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