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VAT on Termination Sums and Liquidated Damages: HMRC Guidance Update #2

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HMRC has confirmed that, from 1 April 2022, the entirety of both termination sums and liquidated damages calculations in the context of asset finance and equipment leasing will constitute taxable supplies for VAT. 

All termination sum and/or liquidated damages calculations will, from the implementation date, need to include VAT on both arrears and future rentals.

The change will not be retrospective.

Background

On 2 September 2020, HMRC published a briefing note – RCB 12/20 – altering its long-held position that VAT was not chargeable on termination sums and liquidated damages calculations.

That guidance was subsequently withdrawn, following industry intervention regarding the retrospective nature of the change.

HMRC have now (7 February 2022) published Revenue and Customer Brief 2 (2022): VAT on early termination fees and compensation payments. The new Brief confirms that HMRC’s revised approach to VAT on termination sums and liquidated damages payments must be adopted no later than 1 April 2022.

HMRC’s revised and re-issued guidance confirms, without substantive variation from Brief 12/20, that the entirety of both termination sums and liquidated damages calculations follow the VAT treatment of the underlying supply of goods or services in respect of which the damages or termination sum arises. 

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