UK and International Tax news

VAT Treatment of Early Termination Fees Update

Wednesday 16th February 2022

HMRC has issued Revenue and Customs Brief 2/22 and a revised policy on early termination fees and compensation payments.

Following representations from industry the previous Brief 12/20 and guidance issued in September 2020 was suspended in January 2021. HMRC has reviewed the policy in the light of those representations and is adopting a revised policy which will take effect from 1 April 2022. HMRC indicates that the revised policy will result in fewer payments being regarded as within the scope of VAT compared to the policy set out in 2020.

Previous HMRC guidance had provided that where customers are charged to withdraw from agreements to receive goods or services, these charges were not generally for a supply and were outside the scope of VAT.  Following recent CJEU judgments in Meo (C-295/17 ) and Vodafone Portugal (C-43/19), where it was evident that such charges were normally considered as being for the supply of goods or services  which the customer had contracted for, most early termination and cancellation fees should be liable for VAT, even if they were described as compensation or damages. HMRC guidance in Brief 12/20 indicated that such fees should be generally liable for VAT.

HMRC policy on early termination fees and similar payments will now change from 1 April 2022. Guidance manuals on charges described as compensation or early termination fees are being changed to make it clear when HMRC considers they are payments for a supply and potentially liable for VAT.

The main impact of the revised policy is that fees charged when customers terminate a contract early will be regarded as further consideration for the contracted supply. For example, if a customer is charged a fee for exiting a mobile phone contract early, or if they terminate a car hire contract early, it will be liable for VAT.

This does not affect the tax treatment of full or part payments made on account for a taxable supply, which is explained in Revenue and Customs Brief 13/2018.

If you would like more details on the above, please contact Keith Rushen on 0207 486 2378.

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