16th February 2022

From 1 April 2022, HRMC’s policy on the VAT treatment applicable to early termination fees and compensation payments is changing. The Revenue and Customs Brief 2 (2022) is available here.

Previous guidance issued in September 2020 was suspended in January 2021 after representations from industry.

The revision to the policy now means that fees charged when customers end a contract early will be regarded as further consideration for the contracted supply and follow the same VAT treatment as the contracted supply.

Most early termination fees and some cancellation fees are liable for VAT if the goods or services for which the fees have been paid are liable for VAT, even if they are described as compensation or damages.

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 now be liable for VAT. Previously, these charges were not generally for a supply and were considered outside the scope of VAT. UNW’s VAT Partner, Mark Hetherington, said: ‘HMRC’s revised policy comes as no surprise and is in line with recent judgements in case law and applies common sense. It is pleasing though that HMRC changed their earlier views and have now also acknowledged that certain payments (such as leasehold property dilapidations) are properly regarded as compensatory and remain outside the scope of VAT (i.e. non-VATable).’

Further information regarding the revision to the policy can be found here.

If you would like more information on this topic, please do not hesitate to contact one of our dedicated VAT specialists: Mark Hetherington, VAT Partner, on 0191 243 6073 or at markhetherington@unw.co.uk; or Ian Coulthard, VAT Senior Manager, on 0191 243 6017 or at iancoulthard@unw.co.uk.

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