It is quite common for suppliers to charge a fee where the customer wishes to cancel a contract or terminate a contract early.  In these cases HMRC’s guidance was that these fees were generally outside the scope of VAT as they were a form of compensation for the supplier.

On 2 September HMRC issued Revenue and Customs Brief 12 (2020) announcing that, “Most early termination and cancellation fees are … liable for VAT. This is the case even if they are described as compensation or damages.”  The old guidance has been withdrawn and new guidance published setting out HMRC’s revised position.  The change of mind follows the decisions in two CJEU cases, most recently involving charges made for cancelling or changing mobile phone contracts.

Controversially, HMRC have invited businesses to review cancellation charges made in the last four years and make a disclosure of error if they have incorrectly treated these charges as outside the scope of VAT.  In the past, when there has been a change of HMRC’s policy, the change has taken effect only from the date of publication or some future date to allow businesses to adjust their systems.

If businesses have previously received a written ruling from HMRC that their cancellation or termination fees were outside the scope they must apply the new treatment from 2 September 2020, they do not need to adjust previous VAT returns.