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HMRC Reverses Course on Retroactivity of VAT

HMRC Changes VAT Rules for Early Contract Termination Fees Background Decorative Image

Previously, we reported that HMRC reversed its position on early termination fees, announcing on 2 September 2020 that such fees would be subject to VAT and taking the controversial position that this change in policy would be retroactive. In another reversal, HMRC has now announced that the change will apply from a future date only, not retroactively.1

HMRC made the announcement on 25 January 2021 as a consequence of representations from affected businesses and their representatives. Revised guidance and a new brief, expected shortly, will set out guidance on what businesses are expected to do going forward and how businesses already treating early contract termination fees as subject to VAT following its earlier brief should proceed.

As an interim measure until the new guidance is issued, HMRC has stated that businesses can either (i) continue to subject affected payments to VAT, or (ii) treat such payments as outside the scope of VAT in cases where the payments were so treated before 2 September 2020. This will be a welcome announcement for businesses as it removes a precedent for HMRC imposing retroactive measures.

1 https://www.gov.uk/government/publications/revenue-and-customs-brief-12-2020-vat-early-termination-fees-and-compensation-payments

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.