HMRC’s updated guidance on Compensation Payments and VAT

Dec 10, 2020

Until recently, the default position was that compensation payments were outside the scope of VAT. However, recent guidance from HMRC has changed this position.

Recent consideration by the UK courts and the European Court of Justice of compensation payments has resulted in a change in the approach to their VAT status. HMRC have since released guidance supporting this change meaning that compensation payments are now generally liable to VAT. The guidance was published in HMRC’s Business Brief 12/20 (2 September 2020).

The Former Position

The former default position was that compensation payments were outside the scope of VAT as they were not consideration for a supply. In practice this meant that where a lease contained a compensation provision, for example where a compensation payment arises for early termination, the payment would not be subject to VAT (unless an option to tax has been made by the party receiving the payment).

If you would like to find out more about VAT, Commercial Property and the Option to Tax, please take a look at this article: https://www.herrington-carmichael.com/vat-commercial-property/.

The ‘New’ Position

The new guidance from HMRC makes it clear that compensation payments (or payments described as ‘compensation or damages’) are now generally liable to VAT. In practice, this now means that a compensation, early termination and/or cancellation payment may be considered a payment for a supply and, if so, will be liable for VAT.

Rather unusually, HMRC’s guidance also advises that the new position will be retrospective. Therefore, a VATable person who has received a compensation payment prior to the release of the above mentioned guidance must also account to HMRC for the VAT as soon as possible.

It is important to note that the new approach will not only affect new Leases as it applies where the compensation clause has been exercised. So, if, for example, a lease was dated 10 years ago but the compensation clause was only exercised 2 years ago, the compensation payment would now be potentially subject to VAT.

HMRC does acknowledge that some compensation payments may be true compensation and not payments for supply and therefore will be outside the scope of VAT. In practice this means that when entering into a new lease containing compensation payments, it is now particularly important that the drafting of such compensation clauses clearly reflect the intention of the parties.

In the Real Estate and Construction sector, HMRC’s guidance should be considered carefully in the context of the following types of payments:

• Break payments under leases (whether contained in the lease or otherwise);

• Forfeited contractual deposits;

• Dilapidations payments; and

• Liquidated damages payable pursuant to development agreements and agreements for lease.

Next Steps

If you have received or made compensation payments under your lease within the last 4 years, we advise that you seek specific advice on the VAT status of that payment.

If you require further advice regarding compensation payments and VAT or any other Real Estate matter, please contact Daniel York in our Real Estate department. You can also email your query to realestate@herrington-carmichael.com, call 01276 686222 or submit an online enquiry form.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter

Latest Insights - sign up to our Emailers

Our Emailers will bring you the latest news and insights from our legal teams as we look at the key talking points in life and in law.

Our insights will include articles, podcast discussion and information about our events and services.

You can sign up to as many as you wish and you can opt out at any time.

Sign up to our Emailers






Please see our privacy policy regarding use of your data.


Latest Articles

Top Legal Insights

 

Contract Law

Material Breach of Contract

What is a ‘material’ breach of contract by a party to a commercial contract? This is a critical issue regularly considered by the courts. What constitutes a material breach and what are the remedies?

Property Law

Commercial Lease: The Financial impact on Landlord and Tenant

Coronavirus (COVID-19) and the restrictions now in place to control its spread, are having a significant effect on many business sectors.

Divorce and Family Law

Divorce in Lockdown: Can I get some discreet legal advice?

We have spoken to clients who are unfortunately experiencing some family issues, and would like to obtain expert legal advice, yet don’t know how...

Land & Property Dispute

Restrictive Covenants – The Price of Modification

Having identified that your land is burdened by a restrictive covenant and for the purposes of this article the covenant in question will be that only one residential building can be erected on the land. What do you do next?

Wills, Trusts and Probate

Why is having a will so important?

It is entirely up to you if and when you want to create a Will, but it is important to be aware of the consequences of not having a Will.

Award winning legal advice

Herrington Carmichael offers legal advice to UK and International businesses as well as individuals and families. Rated as a ‘Leading Firm 2024’ by the legal directory Legal 500 and listed in The Times ‘Best Law Firms 2023 & 2024’. Herrington Carmichael has offices in London, Farnborough, Reading, and Ascot.

+44 (0)1276 686 222

Email: info@herrington-carmichael.com

Farnborough
Brennan House, Farnborough Aerospace Centre Business Park, Farnborough, GU14 6XR

Reading (Appointment only)
The Abbey, Abbey Gardens, Abbey Street, Reading RG1 3BA

Ascot (Appointment only)
102, Berkshire House, 39-51 High Street, Ascot, Berkshire SL5 7HY

London (Appointment only)
60 St Martins Lane, Covent Garden, London WC2N 4JS

Privacy Policy   |   Legal Notices, T&Cs, Complaints Resolution   |   Cookies  |   Client Feedback   |  Diversity Data

 

 

Our Services

Corporate Lawyers
Commercial Lawyers
Commercial Property Lawyers
Conveyancing Solicitors
Dispute Resolution Lawyers
Divorce & Family Lawyers
Employment Lawyers
Immigration Law Services
Private Wealth & Inheritance Lawyers
Startups & New Business Lawyers

Pay Online >

Please be aware that we have no plans to change our bank details. If you receive any indication that any of our bank details have changed please contact us before sending us any funds. We take no responsibility for monies you transfer into the wrong bank account.

© 2024 Herrington Carmichael LLP. Registered in England and Wales company number OC322293.

Herrington Carmichael LLP is authorised and regulated by the Solicitors Regulation Authority with registration number 446245.