January 22, 2021 / UK
Historically, HMRC has viewed compensation payments as being outside the scope of VAT rather than being consideration for any supply. Following various CJEU and other case decisions finding that similar payments were actually consideration for supplies, HMRC revisited its position on compensation payments. In particular, taking the view that these type of payments will no longer be treated as outside the scope of VAT but will form part of the underlying supply of property rental where they form a cost component to the supplier (i.e. landlord) of making the intended supply available – consequently, either VAT exempt or taxable, depending on the VAT liability of the main property supply. Only where no direct link exists between a payment and a supply will HMRC consider this to be a payment which is outside the scope of VAT [VATSC05910].
Initially, as set out in Revenue & Customs Brief 12/20 dated 2 September 2020, HMRC intended to apply this change in VAT treatment retrospectively, bringing significant uncertainties for affected businesses. However, following representations by a number of public bodies (and the property industry) with concerns regarding these changes, HMRC has confirmed that this will no longer be the case. This is welcome news, as many businesses have needed to consider whether they would be required to make retrospective adjustments, whether VAT would be collectable from counterparties and whether an extensive review of past transactions would be needed. Given the significant challenges for businesses, taken together with current market conditions and the COVID situation, HMRC has seen sense and therefore taken the right approach in removing retrospective effect of the changes. HMRC initially indicated that any changes would be effective from 1 February 2021, but given it is now already towards the end of January 2021, this may be delayed. Draft HMRC guidance has already been released to stakeholders for comment and the new HMRC guidance is expected to be finalised shortly.
What type of payments are likely to be covered by HMRC’s changes?
In practice, when considering the VAT treatment of compensation type payments, it needs to be established if the payments being made are sufficiently (directly) linked to a particular supply or not. In some cases, a payment could relate to a combination of items including a supply and other items not considered to be a supply, in which case, an apportionment will be needed…
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