New guidance on VAT and early termination fees

7 September: Following decisions in the EU Court of Justice HMRC has changed guidance for businesses charging customers a fee to withdraw from supply agreements.

Update 26 January: HMRC has confirmed it will now apply this brief "from a future date" and that a new brief will be published "shortly" to explain what businesses should do in the meantime.

HMRC has issued Revenue and Customs Brief 12 (2020) to provide an update on the VAT treatment of compensation and similar early termination payments following judgments of the Court of Justice of the European Union (CJEU) in Meo (C-295/17) and Vodafone Portugal (C-43/19).

The judgments make it clear that charges to withdraw from agreements to receive goods or services are normally considered as being for the supply of goods or services for which the customer has been contracted. Most early termination and cancellation fees are therefore liable for VAT. This is the case even if they are described as compensation or damages.

Previous HMRC guidance stated that when customers are charged compensation or early termination fees in a contract, these charges were not generally for a supply and were outside the scope of VAT.

HMRC has now changed this guidance to clarify that these charges are generally liable for VAT. The new guidance can be found in HMRC’s VAT Supply and Consideration Manual at VATSC05910, VATSC05920 and VATSC05930.

HMRC now states that any taxable person that has failed to account for VAT on such fees should correct the error using the normal procedures. However, if a specific ruling has been received from HMRC that such fees are outside the scope of VAT, the taxable person should only account for VAT on such fees received after the issue of Revenue and Customs Brief 12 (2020) on 2 September 2020.

The Bloomsbury Professional VAT annual is updated regularly during the year. Visit the homepage here to get the last guidance.