When a contract allows an early termination but for an early termination fee, this fee is a further consideration for the agreed original supply. Only if an exemption applies to this supply no VAT is due.
The revised guidance is based on a recent ECJ case (Vodafone Portugal C-43/19), where the European Court rules that contractual payments made by customers on the early termination of their fixed term contracts constituted consideration for the supply of the services for which the customers contracted (telecommunications services in this case), rather than compensation for breach.
Changes in HMRC guidance
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.
Please note that the revised guidance suggests that HMRC’s change of view is to be applied retrospectively. HMRC states that “Any taxable person that has failed to account for VAT to HMRC on such fees should correct the error”. However this does not apply if a specific ruling was obtained, in which case the VAT applies from the publication of the revised guidance (brief 12, September 2, 2020).
Interested in VAT and other trade compliance news?
Don't miss any news regarding VAT or other trade compliance areas. Subscribe to our monthly newsletter and receive the latest news updates directly in your mailbox.
Daniëlle van der Meulen-Idema
Sr. VAT Specialist