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

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HM Revenue and Customs -Tax Authorities

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Published 2 September 2020

Purpose of this brief

To give an update on the VAT treatment of compensation and similar payments following recent judgments of the Court of Justice of the European Union (CJEU).

Who needs to read this

Anyone who charges their customers to withdraw from agreements to supply goods or services.

Background

VAT is a tax on the supply of goods and services. 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) it is evident that these 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 are therefore liable for VAT. This is the case even if they are described as compensation or damages.

What has changed

HMRC guidance on charges described as compensation or early termination fees in a contract, have been changed to make it clear that they are generally liable for VAT. 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.

This does not affect the tax treatment of full or part payments made on account for a taxable supply, which is explained in Revenue and Customs Brief 13/18.

Businesses making supplies subject to the Tour Operators’ Margin Scheme, can find out more information in the Revenue and Customs Brief 09/19.

The new guidance can be found at VATSC05910 https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc05910,

VATSC05920 https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc05920

and VATSC05930 https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc05930.

The guidance for VATSC06710, 06720 and 06730 has been withdrawn.

Action

Any taxable person that has failed to account for VAT to HMRC on such fees should correct the error https://www.gov.uk/guidance/how-to-correct-vat-errors-and-make-adjustments-or-claims-vat-notice-70045.

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.


About the Author

© Crown Copyright 2020.

A licence is needed to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs.



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Article Published/Sorted/Amended on Scopulus 2020-09-02 19:48:25 in Tax Articles

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