UK and International Tax news

HMRC U Turn On VAT Treatment of Early Termination Fees and Compensation Payments

Monday 8th February 2021

HMRC has recently reversed a change in policy for the VAT treatment of termination fees and compensation payments previously announced in Brief 12/2020 and confirmed that the new policy will be introduced from a future date.

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, where it was evident that such charges were normally considered as being for the supply of goods or services for which the customer has been contracted for, most early termination and cancellation fees should now be liable for VAT, even if they are described as compensation or damages. HMRC guidance in Brief 12/20 indicated that such fees should be generally liable for VAT so where, for example, charges are made when exiting one contract and entering into another to upgrade a mobile telephone package or handset, these will liable for VAT. The Brief also announced that the policy change was to be retrospective and it expected businesses to go back four years and account for output tax on past fees.

Following further communication from businesses and their representatives, HMRC has now decided to defer the updated VAT treatment set out in the Brief to a future date and there will be new guidance on what to do if taxpayers have already changed how they treat such payments because of this Brief.

HMR has confirmed that until that guidance is issued businesses can either continue to treat such payments as further consideration for the contracted supply, or go back to treating them as outside the scope of VAT, if that is how they treated them before the brief was issued.


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