HMRC policy on early termination fees and similar payments is changing from 1 April 2022. HMRC now considers that some charges made by businesses to their customers to withdraw early from agreements to supply goods or services are payments for a supply and so liable for VAT at the rate of VAT that the goods or services would be charged if they had been supplied.
The main effect of the revised policy is that fees charged when customers terminate a contract early will be regarded as further consideration for the contracted supply. For example, if a customer is charged a fee for exiting a mobile phone contract early, or if they terminate a car hire contract early, it will be liable for VAT at the prevailing rate.
HMRC says all businesses must adopt the revised treatment no later than 1 April 2022. This includes any taxable person that has had a specific ruling form HMRC saying that such fees are outside the scope of VAT.
Businesses that have adopted the revised treatment for payments that are further consideration for supplies should continue to treat these supplies in accordance with the revised policy.
Any business that adopted the treatment outlined in the guidance published in September 2020 and accounted for VAT on transactions which under the latest guidance are outside the scope of VAT should correct this by the normal error correction method.