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Termination traps
Key points
- HMRC has changed the VAT treatment of payments arising from early contract termination to make them a taxable supply.
- Effect of the change on landlords and tenants.
- Problems may arise for landlords that have tried to help tenants during lockdown.
- The change of treatment is retrospective so VAT adjustments may be required for the past four years.
At its heart VAT is a straightforward tax on consumption. Suppose a modern day Oscar Wilde (a long-time resident of Chelsea) buys a suit from Liberty (a VAT-registered shop) and is charged an amount plus VAT. He wears that suit to a meeting with his solicitor who is advising him about his libel action and he is charged an amount plus VAT for the meeting.
If his libel action succeeded and he won damages that would be pure compensation; it would not be a payment for a VATable supply by Oscar...
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