HMRC has announced changes to the treatment of “compensation” and similar payments in its Revenue and Customs Brief 12 (2020).
This is as a result of recent judgments of the Court of Justice of the European Union (CJEU), specifically Meo (C-295/17) and Vodafone Portugal (C-43/19).
Background
Previous HMRC guidance stated that when customers are charged to withdraw from agreements to receive goods or services, these charges were not generally for a supply and were outside the scope of VAT; being compensatory in nature.
New treatment
Now, as a result of the CJEU cases, it is apparent that such charges are considered as being payment for the supply of goods or services for which the customer originally contracted. Consequently, most early termination and cancellation fees are standard rated. HMRC comment that this is the case even if they are described as compensation or damages (which, if an accurate description, remain VAT free). An example of this is given as; charges made when exiting one contract and entering into another to upgrade a mobile telephone package or handset.
Action
Any businesses which have not accounted for output tax on receipt of these payments are required to amend past declarations.
Commentary
The retrospective nature of this announcement seems unfair and is likely to cause administrative problems for a lot of businesses. The other issue is that HMRC have not said how far back such adjustments apply, is it: The usual four-year cap? The earlier of the two EJEU cases mentioned (2018)? The June 2020 Vodafone case? Some other date?
It does not appear that the relevant date will be the date of issue of the changes – 2 September 2020 as HMRC say that this date will only apply to certain businesses (those that have received a specific written ruling) so where does that leave the majority of other taxpayers? HMRC remain silent on this and it does not help those affected at all. It is possible that retrospection may be challengeable via judicial review.
While the application of the new rules seems logical and consistent with case law, the implementation and lack of detail is really, to be polite, unhelpful.