HMRC have recently published a new brief that provides an important update on the VAT treatment of early termination, compensation and similar payments. All businesses must adopt the amended treatment from 1 April 2022.

This brief replaces an earlier one ‘Revenue and Customs Brief 12 (2020)’ that was suspended in January 2021 following representations from industry. It’s worth mentioning that where you may have adopted the 2020 treatment and accounted for VAT on charges that would be outside the scope of VAT under the new guidance, this can be corrected in the normal way. Correct errors on your VAT Returns

What has changed?

Previous HMRC guidance stated that where a charge for customers to terminate agreements to receive goods/services exists, these charges were not generally for a supply and therefore were outside the scope of VAT. However, CJEU judgements in Meo (C-295/17) and Vodafone Portugal (C-43/19) held that some early termination charges were further consideration for the contracted goods/services. In practice this means that many early termination charges and some cancellation fees are liable to VAT where the goods/services that the charges relate to are liable to VAT.

An example of where this could apply in practice is to early termination charges on lease cars that will now be liable to VAT.

You can find HMRC’s latest guidance here: VATSC05910, VATSC05920 and VATSC05930.

Where you may have any questions/concerns, please feel free to contact your VAT consultant, or contact us here.