Real Estate Tip of the Week: Compensation Sums and VAT – A Major U-Turn

Published 9 septiembre 2020

If a tenant exercises a break clause and pays a break fee you should be aware that the VAT treatment is now different following two European Court of Justice cases. Last week HMRC published a business brief and they now expect all such payments to be VATable. So long as the lease describes the break fee as exclusive of VAT (or uses similar such wording) the tenant will have to pay VAT in addition to the break fee.

You should bear in mind that because this is as a result of case law, this is technically not a change going forward; instead it is an explanation of what the position has always been. HMRC therefore recommend you review past breaks and other compensation payments.

This is a major U-turn by the courts on the VAT position of compensation sums and contract terminations. Up until now, the position on contract compensation or early termination payments has been driven by two cases Croydon Hotel and Holiday Inns (so most of these were outside the scope of VAT) but these have basically been overruled by the European Court of Justice (Vodafone Portugal and MEO).

Please get in touch with our tax team if you require advice in relation to such VAT payments.