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VAT Treatment of Early Termination Fees and Compensation Payments

Wednesday 23rd September 2020

HMRC has recently issued Brief 12/20 on the VAT treatment of early termination fees and compensation payments.

The Revenue and Customs Brief provides an update to the VAT treatment of compensation and similar payments following recent judgments of the Court of Justice of the European Union.

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 is evident that such charges are 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. This will be the case even if they are described as compensation or damages.

HMRC guidance on charges described as compensation or early termination fees in a contract has been changed to make it clear that such fees are generally liable for VAT. Where, for example, charges made when exiting one contract and entering into another to upgrade a mobile telephone package or handset, these will liable for VAT.

HMRC advises that any taxable person who has failed to account for VAT to HMRC on such fees should correct the error.  Any taxable person that has had a specific ruling from HMRC saying that such fees are outside the scope of VAT should account for VAT on such fees received after the issue of this Revenue and Customs Brief.

This does not affect the tax treatment of full or part payments made on account for a taxable supply, as explained in Revenue and Customs Bried 13/18. This brief updated HMRC policy in relation to businesses that retain payments and deposits for goods and services which customers do not take up following CJEU decisions.

 

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

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