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Markel Tax

15 Sep 2020

HMRC’s guidance – not worth the paper it’s written on?

HMRC have just announced in Revenue & Customs Brief 12/20 that they have changed their view on the VAT liability of various compensation payments. This Brief goes on to state that even where taxpayers have relied on HMRC’s previously published position, VAT should now be paid on any compensation received in the past 4 years. 

HMRC traditionally accepted that early termination charges and other compensation payments could be outside the scope of VAT. The mechanics of this was specifically dealt with in their guidance manuals. 

However, on the back of the European court’s (CJEU) judgments in MEO and Vodafone Portugal (both of which related to the early termination of consumer broadband contracts) HMRC have changed their position. Such charges will now normally be seen as additional consideration for a supply, regardless of how they are described.  

HMRC's manuals have been updated to reflect this change of position, specifically referring to early upgrade fees charged by telecom providers, charges for the termination of asset finance leases and, more broadly, liquidated damages clauses and charges for breaches of contract as being subject to VAT.

Any business which has a specific written ruling from HMRC that such fees described are outside the scope of VAT is not entitled to rely on that ruling with effect from 2 September 2020. However, any business which does not have a written ruling, but instead relied on HMRC’s guidance, will need to correct any historical “errors” made in the past four years. 

This is manifestly unfair, but such questions of “legitimate expectation” are probably not suitable for a normal tax appeal route and instead might require the taxpayer to seek a Judicial Review of the decision. 

Judicial Review is similar to appealing to a Tax Tribunal in that the taxpayer is disagreeing with HMRC and wants its case be decided by a judge independent of HMRC, but the Tax Tribunal can only hear certain matters. Markel Tax have experience of assisting clients with Judicial Review actions and would be happy to support businesses through the process.  

For more information, please contact Stuart Brodie at Markel Tax on 0370 218 5278​.

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Tagged Value added tax (VAT) services
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