VAT: Early Termination & Compensation Payments

18 February 2022 Lynne Gill View all News

HMRC have issued Revenue & Customs Brief 2 (2022) setting out their change of policy on the VAT treatment of early termination fees and similar payments.

Historically, these payments have been viewed as being outside the scope of VAT.

HMRC now considers that charges made by businesses to their customers wishing to withdraw early from agreements for the supply of goods or services are further payments for a supply and are potentially subject to VAT.

HMRC’s view is that fees charged when customers terminate a contract early are further consideration for a contracted supply. For example, a fee charged when a customer exits a mobile phone contract early or terminates a care hire contract early is now liable for VAT.

All businesses must adopt this revised treatment no later than 1 April 2022 even if they have a ruling from HMRC which states that early termination fees/compensation payments are outside the scope of VAT.

The Shorts VAT team has decades of combined experience helping businesses navigate the many complexities of VAT, and thereby helping them avoid any pitfalls.

In addition to early termination and compensation payments, our VAT advisory services also include VAT on Land & Property, VAT in the construction industry, VAT on imports and exports, VAT when buying or selling a business, and international VAT issues.

If you or anyone at your company has a query, or is facing a challenge relating to early termination and compensation payments, or any other VAT considerations, our experienced VAT advisory team will be more than happy to help. Get in touch with the team today for a consultation.

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