Early Termination Payments

Early Termination Payments & VAT

This is potentially a huge issue so please do not assume this doesn’t affect you, it might and it could be really big!! HMRC have announced an important change to how they see Early Termination Payments & VAT need to be treated – click here to read in full.

While this phrase ‘Early Termination Payments‘ might sound like something that won’t affect very many businesses, when you stop and think about it, the implications are quite scary. This basically affects any situation where a customer pays to be released from a contract. So that could include any kind of release fee including a lot of high value situations like phones, cars, all kinds of consumer goods and property leases.

What makes this change into an enormous one is that HMRC are applying it retrospectively. So wrong on soooo many levels!

Not only did HMRC announce a change in policy, they have also said that the new rules have to be applied over the last 4-years. Generally a change in policy has only ever been applied from a current or forward date. HMRC might decide or accept that their policy had been flawed and announce a policy change but usually only after it has first been aired with industry and their advisors. But not this time.

Until now HMRCs guidance was clear in saying that when a customer had to pay a fee to terminate an agreement early, the fee was outside the scope of VAT. Following the decisions in Vodafone Portugal C–43/19 and MEO — Serviços de Comunicações e Multimédia SA C–295/17 HMRC now considers that the previous policy was wrong and such charges should have been liable to VAT.

The two cases cited were decided in the ECJ which confirmed that if a contract specifies a fee to be paid on early termination, that fee represents consideration paid for a supply with VAT due and should not be treated as compensation that falls outside the scope of VAT.

In the RCB HMRC says that “Any taxable person that has failed to account for VAT to HMRC on such fees should correct the error.But heavens above what error? The non-VATable treatment is what HMRC told them to do!! The exception is that if a business had a ruling from HMRC confirming that such fees were outside the scope of VAT, then they only have to account for VAT on such fees after the date of the RCB which was issued on 02 September 2020.

The ripple effects of this policy change go on and on. Given that HMRC’s policy has been clearly confirmed in their guidance in the past, what the RCB really means is that none of us can ever rely on their guidance ever again. Think about that!!

So now we all need to get written rulings – Given that HMRC have always refused to provide a ruling where their guidance is clear; as none of us can now rely on guidance anymore and those with a ruling have an amnesty under the RCB protecting them against retrospective VAT adjustments, that can only mean we all have to inisist on rulings going forwards otherwise we cannot be sure HMRC won’t change their minds.

Please also think about businesses who received payments from departing customers who have well and truly departed. It seems very unlikely that many businesses will now be able to collect VAT on Early Termination Payments received on contracts that were concluded literally years ago. Especially when you think that lots of those payments will have come from members of the public who certainly won’t contemplate paying anything extra now by way of a late VAT charge.

I have always resisted being a critic of the VAT system unless there is real just cause and this announcement is outstandingly in need of being criticised. Businesses have had Government support through the Covid-19 nightmare and then we get this quite unfair and inequitable policy change pushing the other way. It really beggars belief that HMRC are trying to impose this new policy retrospectively. We have to hope that the level of noise coming from what I hope will be a lot of objection will cause HMRC to alter the effective date to a current or forward date. Come on HMRC, be fair!!

If you are affected by this change in policy or indeed any other VAT issues, why not give us a call. Remember with VAT ‘sooner is always better’.

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