UK: VAT on early termination fees and compensation payments

UK’s HMRC adapts its view on the VAT treatment of early termination fees and compensation payments. 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. But following the recent judgments of the European Court of Justice in Meo (C-295/17) and Vodafone Portugal (C-43/19), it is evident for HMRC that such charges are normally considered as being for the supply of goods or services for which the customer has been contracted for.

As a result, according to HMRC, most early termination and cancellation fees are therefore liable for VAT. This is the case even if they are described as compensation or damages.

Any taxable person that has failed to account for VAT to HMRC on such fees should correct the error.

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 (2 September 2020).

Feel free to contact us for any questions.

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