HMRC have published Revenue and Customs Brief 12 (2020): VAT early termination fees and compensation payments. It confirms a change in their view of the VAT treatment of contract termination payments. 

The change follows judgments from the Court of Justice of the European Union (CJEU).

Previous HMRC guidance said when 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 the CJEU judgments in Meo (C-295/17) and most recently in Vodafone Portugal (C-43/19)  the court found that these charges are 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.

HMRC provide an example of the type of contract that might be affected. For example, charges made when exiting one contract and entering into another to upgrade a mobile telephone package or handset are therefore liable for VAT.

The new guidance can be found at VATSC05910VATSC05920 and VATSC05930.

The previous guidance for VATSC06710, 06720 and 06730 has been withdrawn.

External link

Revenue and Customs Brief 12 (2020): VAT early termination fees and compensation payments

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