Following the CJEU rulings in Meo (Case C-295/17) and Vodafone Portugal (Case C-43/19), HMRC has recently updated its VAT Manual and published Revenue & Customs Brief 12/2020 stating that payments arising out of early contract termination will now be treated as consideration for a taxable supply therefore subject to VAT. This marks a significant change from HMRC’s previous position that early termination payments described as compensation payments would ordinarily not be subject to VAT.
In Vodafone Portugal, the CJEU considered that payments made by customers to Vodafone for terminating their contracts before the end of the contractual tie in period constituted consideration for a supply of services within the meaning of Council Directive 2006/112/EC (VAT Directive) so that VAT was payable on such fees. The CJEU held that the amount payable in the event of early termination should be considered an integral part of the price which the customer committed to paying to Vodafone to fulfil its contractual obligations and that the treatment of those termination fees as consideration for a supply accorded with economic reality.
HMRC’s previous guidance acknowledged the difficulties of determining whether a payment is compensatory or forms part of the consideration for a supply. HMRC drew a distinction between contracts with a ‘right to terminate’ and contracts which do not have such a right. HMRC’s previous position was that generally when customers have to make a payment to withdraw from agreements to receive supplies of goods or services such termination payments are not generally treated as consideration for a supply and were therefore outside the scope of VAT. HMRC has now updated its guidance in light of the CJEU’s decision. Below are the key updates:
HMRC’s updates are particularly relevant for businesses which have contracts with customers for minimum commitment periods and customers are subject to termination fees for withdrawal. A business that has failed to account for VAT on such fees should correct such error unless a specific ruling has been obtained from HMRC stating that such fees are outside the scope of VAT.
Robert E Gaut & Philip Gilliland, Proskauer
Following the CJEU rulings in Meo (Case C-295/17) and Vodafone Portugal (Case C-43/19), HMRC has recently updated its VAT Manual and published Revenue & Customs Brief 12/2020 stating that payments arising out of early contract termination will now be treated as consideration for a taxable supply therefore subject to VAT. This marks a significant change from HMRC’s previous position that early termination payments described as compensation payments would ordinarily not be subject to VAT.
In Vodafone Portugal, the CJEU considered that payments made by customers to Vodafone for terminating their contracts before the end of the contractual tie in period constituted consideration for a supply of services within the meaning of Council Directive 2006/112/EC (VAT Directive) so that VAT was payable on such fees. The CJEU held that the amount payable in the event of early termination should be considered an integral part of the price which the customer committed to paying to Vodafone to fulfil its contractual obligations and that the treatment of those termination fees as consideration for a supply accorded with economic reality.
HMRC’s previous guidance acknowledged the difficulties of determining whether a payment is compensatory or forms part of the consideration for a supply. HMRC drew a distinction between contracts with a ‘right to terminate’ and contracts which do not have such a right. HMRC’s previous position was that generally when customers have to make a payment to withdraw from agreements to receive supplies of goods or services such termination payments are not generally treated as consideration for a supply and were therefore outside the scope of VAT. HMRC has now updated its guidance in light of the CJEU’s decision. Below are the key updates:
HMRC’s updates are particularly relevant for businesses which have contracts with customers for minimum commitment periods and customers are subject to termination fees for withdrawal. A business that has failed to account for VAT on such fees should correct such error unless a specific ruling has been obtained from HMRC stating that such fees are outside the scope of VAT.
Robert E Gaut & Philip Gilliland, Proskauer