Practical aspects of HMRC’s retrospective change on VAT and contract terminations

On 2 September 2020 HMRC published Revenue & Customs Brief 12/2020 setting out a change in the VAT treatment of payments made in respect of contract terminations and contractual disputes. HMRC’s new general rule is that most such payments will be subject to VAT instead of outside the scope as per HMRC’s previous guidance. Surprisingly the brief says that the change will have retrospective effect unless you have a specific ruling that VAT was not payable.

For more detail on HMRC’s change of stance see ‘VAT on contract terminations and settlements: HMRC pushes the boundaries’ (Eloise Walker) Tax Journal 25 September 2020. This article considers the practical steps for businesses that received compensation payments before the brief was issued which they thought were not subject to VAT but now find themselves with a potential VAT liability.

Can HMRC change its guidance...