VAT on lease break payments
In September 2020 – following two important judgments delivered by the Court of Justice of the European Union – HMRC published its Revenue & Customs Brief 12 (2020) which contained updated guidance on the position of VAT on payments made in relation to the termination of contracts.
The crux of the change was that termination payments will be treated as subject to VAT, rather than being treated as outside the scope of VAT. Originally, the Brief said that the VAT charges would apply retrospectively, meaning that any party who had paid or received a termination payment in the last 4 years would have to account for the VAT on it and revisit who was liable to pay the VAT. However, HMRC has had a change of heart and has now confirmed that the VAT status will not now be applied retrospectively, but will instead apply at a future (as yet unknown) date.
Whilst we expect to hear further guidance from HMRC in the future, including illustrative examples, for now, the VAT status of break payments can either be treated as further consideration for the contracted supply, or as outside the scope of VAT if that is how they had been treated previously.
HMRC’s new position on VAT and dilapidations payments is still unclear and advice should be sought at an early stage.