A new requirement has been introduced by HMRC in respect of the VAT treatment of compensation and termination payments.
Businesses that charge customers to withdraw from agreements to supply goods or services will be affected.
Historically, HMRC’s stance was that such payments were not for a supply and therefore outside the scope of UK VAT. However, following CJEU judgements, some charges are considered additional consideration for the supply of goods or services.
Accordingly, most early termination fees and some cancellation charges are liable to VAT at the standard-rate, where the underlying goods or services themselves would be VATable.
An example could be where a consumer cancels a mobile phone contract or a gym membership. This also relates to payments such as liquidated damages.
Businesses must review any rulings previously received where HMRC has confirmed such payments are outside the scope of UK VAT.
A business should review its systems to ensure it complies with the new guidance from 1 April 2022, considering whether any adjustments for past VAT returns are now appropriate.