0345 686 6551
HMRC’s new policy will come into effect on 1st April 2022. It is published in Revenue and Customs Brief 2 (2022).
Why is it important?
This is an important release from HMRC due to previous controversial commentary on such transactions and will have an impact on many sectors including the housing, education and charity sectors. This guidance is particularly important at this time as many organisations are changing the contracts that they are involved in post-Covid. For example, cancelling various contracts with suppliers that support the office working environment, paying or receiving compensation for a party being unable to fulfil contractual obligations.
What should you do?
The revised guidance still leaves a number of uncertainties and does not contain enough practical examples to provide certainty to taxpayers.
It is essential that housing associations and charities consider this guidance as both a customer and a supplier. The risk in each case is as follows;
As a supplier, it is important that output tax is accounted for correctly on any income received.
As a customer, it is essential that you are not incorrectly charged output tax. It will either fall as an unnecessary cost, or if you try to recover incorrectly charged VAT, you will be denied recovery and penalties will be considered by HMRC.
Given the changing world that we are operating in and this new guidance, it is worth taking the time to check any such arrangements and determine the correct VAT treatment.
We can help you identify and review relevant arrangements. This can be carried out independently or as part of a wider post-Covid VAT review – for example other post Covid issues are the changing use of office space, and there are lots more post-Covid VAT issues in all sectors.
The key points
The new guidance will not apply retrospectively.
HMRC has confirmed that some payments described as compensation or liquidated damages are consideration for supplies. If consideration for a supply, VAT may need to be accounted for dependant on the VAT liability of the supply.
HMRC states that payments will be consideration where there is a direct link between a payment from a customer and a service provided by a supplier.
Payments due under a property lease to ensure that landlords are compensated when a tenant leaves a property in a condition that is not as agreed, usually known as ‘dilapidation’ payments, will remain outside the scope of VAT.
HMRC are relatively clear that payments made by a customer for terminating a contract will usually be consideration for a supply. Examples given by HMRC are mobile phone contracts and vehicle finance leases.
HMRC does not comment directly on how its policy might affect a payment to exercise a break clause in a property lease.
The new policy confirms that it will view payments for the late return of hired goods to be consideration and therefore subject to VAT.
Fines e.g. parking fines will usually be viewed as additional payment for the underlying supply. However, if such fines are at a level that is ‘clearly punitive and is designed to prevent a breach of contract rather than to compensate for lost income’ it could be outside the scope of VAT. There is clearly some discretion as to when a payment may be punitive.
Where a supplier breaches the terms of a contract and therefore the price is retrospectively reduced, the supplier must adjust the VAT it has previously accounted for. However, if the price is not adjusted, and instead the supplier agrees to pay liquidated damages for the loss caused to the customer, the treatment can be outside the scope of VAT.
HMRC will consider claims for VAT overpaid prior to 1st April 2022 in cases where VAT was charged on compensation payments based on the September 2020 (now withdrawn) guidance.