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VAT: early termination and compensation payments

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Revenue and Customs Brief 2/2022: VAT early termination fees and compensation payments sets out HMRC’s change of policy on the VAT treatment of early termination fees and similar payments from 1 April 2022. HMRC now considers that charges made by businesses to their customers to withdraw early from agreements to supply goods or services are further payments for a supply and potentially liable for VAT.

The main impact of the revised policy is that fees charged when customers terminate a contract early will be regarded as further consideration for the contracted supply. 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, they will be liable for VAT.

All businesses must adopt the revised treatment no later than 1 April 2022. This includes any taxable person that has had a specific ruling from HMRC saying that such fees are outside the scope of VAT.

Businesses which adopted the revised treatment following the interim guidance published in Revenue and Customs Brief 12/2020 are advised to continue to treat the supplies in accordance with the revised policy. HMRC has also published revised guidance in its VAT supply and consideration manual (e.g. para VATSC05910).

Issue: 1563
Categories: News