Revenue and Customs Brief 12 (2020) VAT early termination fees and compensation payments
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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.
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
The guidance for VATSC06710, 06720 and 06730 has been withdrawn.
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.
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