VAT on early termination fees, compensation, and dilapidation payments
From April 2022 HMRC began to apply a new interpretation of how VAT applies to compensation payments.
Historically a payment for terminating a contract, or where compensation was paid, was not treated as a supply and was outside the scope of VAT. This changed with Revenue & Customs Brief 2 (2022), which notified HMRC’s new stance on the VAT treatment of these payments.
The main change being that fees charged when customers terminate a contract early will be regarded as further consideration for the contracted supply. This stemmed from an EU case involving Vodafone and which found that a payment to allow early termination of a mobile phone contract was an integral part of the price the customer agreed to pay, so was subject to VAT in the same way as the underlying phone contract.
HMRC have changed their policy to adopt this treatment, but this does not extend to property dilapidation payments, which remain outside the scope of VAT. Similarly non-contractual compensation remains outside the scope, such as consequential damages payments from supplier to customer. Any contractual compensation, including liquidated damages, is now subject to VAT.
For further information, please contact Alan Rolfe on 023 8046 1235