4th October 2022
As previously highlighted, HMRC recently clarified their policy on the VAT treatment of early termination fees and compensation payments as a result of certain European Court cases, which has led to some uncertainty regarding the VAT treatment of such payments. A recent case at the Inner House of the Court of Session (CSIH), Ventgrove Ltd v Kuehne+Nagel Ltd, is the first case to be heard that covers this new policy.
The case in question revolved around a lease agreement between Ventgrove Ltd as the landlord and Kuehne+Nagel as the tenant, and the VAT treatment of the break clause within the agreement.
Ventgrove had made an election to opt to tax the land and so was charging rent to Kuehne+Nagel with VAT being charged accordingly. Within the agreement, there was a break clause which allowed Kuehne+Nagel to terminate the lease early provided it paid Ventgrove £112,500 ‘together with any VAT properly due thereon’.
Kuehne+Nagel exercised this break clause on 23 February 2021, paying Ventgrove £112,500. However, Ventgrove contended that this break clause was not valid because Kuehne+Nagel had not paid the VAT element due. The Outer House of the Court of Session (CSOH) actually found in favour of Kuehne+Nagel before it was appealed at the CSIH who held that VAT was due on this payment as Ventgrove were insisting.
The interesting aspect of this case is that the CSOH in their original decision took the view that the CJEU decisions which led to the HMRC Brief were not relevant. This was on the basis that they involved compensation costs incurred by a supplier due to a failure to complete a minimum tie in period rather than terminating a lease agreement based on a break clause. The CSIH, however, did not agree and was of the view that these cases and the subsequent HMRC Briefs were relevant.
As highlighted in our previous insights, HMRC released this Brief in December 2020 and they then postponed its effect in January 2021 while they reviewed the position following comments by industry. The revised policy then came into effect from 1 April 2022 so you can see why Kuehne+Nagel felt that they had a case. However, the CSIH held that this postponement should not have impacted the position as the postponement was only relevant to businesses that had an established practice of treating termination payments as being outside the scope of VAT.
Although the HMRC guidance now provides clarification on the VAT treatment of these fees, this case illustrates how the uncertainty regarding the position, especially with regard to the issue and postponement of the HMRC Briefs, can lead to errors and disagreements between landlords and tenants.