Early termination fees are further consideration

HMRC policy on early termination fees and similar payments is changing from 1 April 2022. The department now considers that charges made by businesses to their customers to withdraw early from agreements to supply goods or services are payments for a supply and potentially liable for VAT.

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.

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 from HMRC saying that such fees are outside the scope of VAT.

Businesses that adopted...