VAT treatment of damages and compensation payments

The following Tax practice note provides comprehensive and up to date legal information covering:

  • VAT treatment of damages and compensation payments
  • Is there a supply?
  • Contract termination
  • The Esporta case
  • HMRC’s policy on early termination of contracts
  • Supply of a right to terminate
  • Break fees in share sale negotiations
  • Forfeited deposits
  • HMRC’s policy on forfeited deposits
  • Disputes about previous supplies
  • More...

VAT treatment of damages and compensation payments

FORTHCOMING CHANGE: HMRC is in the process of revising Revenue and Customs Brief 12 (2020) on the VAT treatment of early termination fees and compensation payments. The Brief was issued in September 2020 and caused widespread consternation among VAT practitioners in that it included significant changes to HMRC’s interpretation of the law in this area, and had retrospective effect. In January 2021, HMRC announced that it would revise the Brief, and that it would not apply retrospectively, but from a future date. The revised Brief is expected to set out a more nuanced approach, to the effect that early termination and similar payments will be consideration for a supply if they form a cost component to the supplier of making the intended supply available or are broadly equivalent to what would have been charged for that supply.

A damages or compensation payment may attract VAT. This depends on exactly what the payment is for. If it is purely compensatory, it will be outside the scope of VAT. If, on the other hand, the recipient of the payment (the claimant) does something in return, this will be a supply for VAT purposes.

As with any payment that may attract VAT, it is important to get the treatment right. If the payment is VATable the claimant will want the defendant to pay

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