VAT treatment of payment to exercise break clause

This uncertainty arose because, in September 2020, HMRC issued a Revenue & Customs Brief 12/20 (the Brief) regarding early termination fees and compensation payments. The Brief stated that following the Court of Justice of the European Union (CJEU) cases of Meo and Vodafone Portugal, it had become evident that such charges are normally considered as being for the supply of goods or services for which the customer had contracted, and that this was the case even if they were described as compensation or damages.

HMRC went on to state that any person who had failed to account for VAT on such payments should do so unless they had received specific advice from HMRC that such payments were outside the scope of VAT, in which case they only needed to account for VAT from the date of the Brief.

To say this caused some consternation, particularly with regard to payments in the property sector, is probably an understatement, and the Brief was quickly updated and re-issued on 25 January 2021. This stated that the updated VAT treatment set out in the Brief would only apply from a future date, but until then businesses could either continue to apply the previous treatment or follow the amended guidance – a sort of ‘do what you want’ tax policy.

As at the date of writing (7 January 2022), HMRC have issued no further updates to the Brief but have alluded, in their response to the call for evidence on the land and property VAT exemption, that guidance will be issued in February 2022 and that it is unlikely that dilapidations will become subject to VAT.

Where are we now?

The Outer House of the Court of Session (broadly equivalent to the High Court in England & Wales) released its judgement in the case of Ventgrove Ltd v Kuehne + Nagel on 22 December 2021. The case was not of itself a VAT case but depended on the VAT position of a type of payment referred to above.

Essentially Kuehne + Nagel was a tenant in a building owned by Ventgrove Ltd which had opted to tax the building. The lease had a break clause in it which could be exercised on payment of a fee plus VAT where applicable. Kuehne + Nagel sought to exercise the break clause in February 2021 after the amendment to the Brief had been issued.

They made the appropriate payment, but without VAT. Ventgrove Ltd took Kuehne + Nagel to court arguing that the break clause had not been validly exercised because the amount paid did not include VAT, which Ventgrove Ltd said was due.

The Court, perhaps not surprisingly, found for Kuehne + Nagel because as at the date of the exercise of the break clause, HMRC did not require VAT to be payable on a payment made in order to exercise a break clause under their policy prior to the issue of the Brief. They also did not require payment after the issue in the month before the break was exercised of the update to the Brief.

However, the interesting comments in the case are when the Court remarks that there has been no case where a court or tribunal has considered whether the exercise of an option to terminate a lease which is contained within the original lease is a taxable transaction. Nor was it the Court of Session’s job to do so since it was being asked not to opine on a VAT liability question, but on whether a break clause had been validly exercised.

It then, significantly, went on to remark upon the fact that the Meo and Vodafone Portugal cases, on which HMRC had based their initial change of policy in the Brief, related to compensation payable by the customer for terminating fixed period telecommunications contracts prior to the end of the fixed period and as such, “these cases are not directly in point.”

Compensation for failure to complete a minimum contractual term, calculated by reference to the remaining monthly charges, was not the same as a contractual entitlement to bring a contract to an end after a specified period upon payment of a fee. Nor was the lease terminated prior to the expiry of a minimum period, but at the end of a minimum period. The amount payable to exercise the break was not calculated based on any rent foregone because no rent had been foregone given that there was a contractual right to exit the lease at that time. Similarly, dilapidations are payments for damage done, not compensation for lost earnings.

Whilst the Court did not need to determine what the VAT position of a payment to exercise a break clause to answer the question it had been asked, the comments it makes do raise the question of whether the CJEU cases (which HMRC relied upon to seek to change its long established policy) are at all relevant and have any impact beyond the facts of those specific cases.

IR35: more government departments facing significant tax bills

It has recently been revealed that the Ministry of Justice and the Department for Environment, Food and Rural Affairs are facing combined tax bills of at least £121m. This is due to incorrectly determining the deemed employment status of workers who provide their services via an intermediary, typically a personal service company. Both government departments are likely to incur penalties, but the critical question is whether the engager has taken reasonable care?

This is a significant challenge which both private and public sector engagers must consider, especially as HM Revenue & Customs have stated the light-touch approach that is currently being applied will come to an end on 5 April 2022. Where any business engages contractors, they should review their current policies and procedures to ensure they will withstand any HMRC challenge.

For further information please speak with Nick Bustin, Employment Tax Director, or your usual haysmacintyre contact.


£1bn in support for businesses impacted by Omicron

The Chancellor of the Exchequer announced on 21 December 2021 a series of measures to help businesses most affected by the Omicron variant:

  • Businesses in the hospitality and leisure sectors in England will be eligible for one-off grants of up to £6,000 per premises, plus more than £100m discretionary funding will be made available for local authorities to support other businesses
  • The Government will also cover the cost of Statutory Sick Pay for COVID-19 related absences for small and medium-sized employers across the UK
  • A further £30m will be made available through the Culture Recovery Fund, enabling more cultural organisations in England to apply for support during the winter

These measures will come into effect immediately and we will closely monitor whether any further support packages will be provided by the Government.

For further guidance please speak with your normal haysmacintyre contact.

HMRC One To Many Letters

Over the last couple of years HM Revenue & Customs (HMRC) have issued a number ‘One to Many’ communications, commonly known as ‘nudge letters’.  Nudge letters are used to encourage taxpayers to review their tax affairs. The nudge letters issued to date have covered a wide range of topics including:

  • Overseas income and gains
  • CJRS,
  • Research & Development,
  • Annual Tax on Enveloped Dwellings (ATED),
  • CGT on property disposals,
  • CGT on deferred consideration on business disposals,
  • Disposal of Unlisted Shares and
  • Partnership Discrepancies.

HMRC receives data from a vast number of sources and believe that the use of nudge letters provides it with a cost-effective approach to communicate with a large number of taxpayers. Nudge letters are a standard communication on a specific topic from HMRC to a large group of taxpayers. The letters to date relate either to where HMRC have identified a potential loss of tax or, more broadly, are an educational exercise. The communication can be delivered by letter or even digital means including Personal Tax Accounts, emails or SMS texting.  It is worth noting that agents do not always receive a copy of these communications from HMRC. The communications are aimed at encouraging taxpayers to review their own tax affairs and voluntarily correct any errors or omissions.

It is important to note that a nudge letter is not a statutory enquiry into a taxpayer’s affairs. However, these letters should not be ignored and appropriate action must be taken. This does not mean signing and sending the requested certificate to HMRC, there is no statutory requirement to do so.  If HMRC subsequently open an enquiry and find an error, failure to take action following receipt of a nudge letter could lead to higher penalties being charged.  Our experience has shown that there can be inaccuracies with some of the information held by HMRC, or it has been interpreted incorrectly.


If you have found a mistake in your filings to HMRC, disclosing the error or omission before HMRC send a nudge letter or open an enquiry will reduce the penalty charges.   Following receipt of a nudge letter, a disclosure to HMRC will be treated as ‘prompted’ for penalty purposes.  Prompted penalty rates are higher than those that apply to unprompted penalties.  The maximum prompted penalty for an offshore omission is 200%.

A professional tax adviser can guide a taxpayer through the disclosure process and advise where applicable the penalty mitigation available.  We recommend taxpayers immediately seek professional advice following receipt of an HMRC nudge letter, statutory enquiry or where a taxpayer has found a mistake in their filings to HMRC.

Should you require any professional advice please contact our head of tax disputes and resolutions, Danielle Ford.

Hybrid working arrangements

Working from home allowance

Employers are currently (tax year 2021-22) able to pay employees who are required to work from home £6 per week tax free towards increased costs due to working from home, for example gas and electricity costs.  No records need to be kept of the additional costs incurred providing the £6 payment is not exceeded.  However, the current arrangement will come to an end and the statutory provisions will apply from 6 April 2022.

Purchase of equipment to use at home

There is currently (tax year 2021-22) a temporary tax exemption and National Insurance disregard put into effect to allow employers to reimburse employees who need to buy home office equipment as a result of the COVID-19 outbreak. Similarly, to the working from home allowance this change will come to an end from 6 April 2022.

Travel to the office

The pandemic caused a reduction in the number of employees traveling to the office for the entire working week.  Instead, many employers have introduced new hybrid working arrangements where employees work from a mix of home and the office during the week which raises the question as to where an employee’s permanent workplace is and if an employee reimbursed travel cost is taxable. The following is a high-level summary of the points an employer needs to consider.

However, with this brings the considerations of where an employee’s permanent workplace is and if an employee reimbursed travel cost is taxable.

Travel expenses and permanent v temporary workplace

Travel from home to a permanent workplace is considered as ordinary commuting which is a taxable expense or benefit.

A permanent workplace is a place an employee attends regularly in the performance of their duties which is not a temporary workplace.

A temporary workplace is one which the employee attends for a limited duration or for a temporary purpose. However, if an employee attends somewhere for more than 24 months of continuous work, this place will be a permanent workplace.  Continuous work is deemed by HMRC as an employee undertaking 40% or more of their work at that place.

Working in the office

Where an employee is required to work from the employer’s premises, this will be considered as the employees’ permanent workplace. Consequently, where the employee travels from their home to the office this is ordinary commuting. In these circumstances even if the employee choses to work from home from time to time or has to work at the office outside their normal working hours the office, the employer’s office will still be regarded as the employees’ permanent workplace.  Any payment made by the employer for travel from home to the office will be a taxable expense or benefit.

Formal homeworking arrangement

Where there is a formal homeworking arrangement the application is different. The employee will be contracted to work from home full time which can be considered as the employee’s permanent place of work. Care needs to be taken when looking into any homeworking arrangements which includes:

  • Does the employee work from home occasionally?
  • Does the employee work from home full-time?
  • Do they have a dedicated workspace at home?
  • What is the regularity of any visits to client premises?
  • Finally, who initiated the home working arrangements?

For the employee to obtain tax favourable treatment, the employer must initiate homeworking arrangements and no dedicated workspace can be available to the employee at the employer’s office (now or in the future).

Hybrid working arrangement

The pandemic has accelerated many employers to rethink their position regarding flexible, or hybrid working arrangements. Employers are now offering employees the opportunity to split their working days between home and the office. Under formal homeworking arrangements an employee will always have a desk available to them and their contractual workplace is stated as the office, but the employer is also agreeable to the employee working from home should they wish to do so. As the employee will be attending the office regularly in the performance of their duties, not on a temporary basis. However, the employee will need to consider a wide range of issues, including:

  • What over-arching policies are in place?
  • What changes need to be made to the HR procedure manuals?
  • Whether an changes need to be made to employee expense claim procedures
  • The provision of any workplace benefits

Furthermore, employers need to consider making changes to employment contracts as well.

Cycle to work

Many employers will have made available a cycle to work scheme, helping to encourage employees with the commute between home and the office. Under the scheme there was an expectation that the employee will use the cycle for at least 50% of their journeys to work.

During the pandemic period there was an easement to this requirement so long as the employee had joined the scheme on or before 20 December 2020, in which case they were not required to meet the 50% commuting condition until 5 April 2022.

HMRC do not expect employees to keep detailed records of the use of the cycles. However, employers are required to undertake an annual assessment, ensuring that the cycles are being used for qualify journeys.


As you can see from the above, care needs to be taken where employers are considering paying for or reimbursing an employee’s expenses for home to office travel. The distinction between an employee’s permanent v temporary workplace is an important consideration as well as the reasons for the attendance and HMRC have traditionally applied a very strict approach to ordinary commuting.

Employers should also consider the impact of any benefits which are made available to employees, such as the cycle to work scheme, to ensure all compliance obligations are being met.

For further advice concerning workplace arrangements please contact Nick Bustin, Employment Tax Director.

Business Tax Manager

The Role

Duties and responsibilities would include the following:

  • Managing the corporation tax compliance process for a portfolio of corporate clients including both standalone clients and groups;
  • Tax advisory to partners and clients including:
  • -Structures – company, LLP, etc.;
  • -Restructuring;
  • -Research and development tax relief;
  • -Group tax planning;
  • -International matters;
  • -Venture capital tax reliefs;
  • -Share schemes and valuations;
  • -Corporate and property acquisitions and disposals; and
  • -Tax sections due diligence reports.
  • Identifying tax efficient opportunities for clients and liaising with partners on implementing those opportunities;
  • Responsible for managing billing and work in progress;
  • Team responsibilities including line management for junior staff and assisting in development, training and the appraisal process for sub team staff; and
  • Involvement in business development of the firm including attending networking events and opportunity to join a sector group.

Person Specification

  • Deliver work to a high standard and willingness to provide an excellent client service;
  • Able to demonstrate good client focused skills, ability to work unsupervised, work within a team, influence and negotiate;
  • Excellent communication skills essential, being able to communicate with all levels externally and internally; and
  • Show creativity with desire to identify possible tax opportunities and potential pitfalls.

Work-Based Competencies

  • Has previously managed a client portfolio including groups;
  • Ideally be CTA qualified;
  • Good Microsoft skills, outlook, excel, word; and
  • Alpha tax knowledge preferred.