Category Archives: VAT Payment

VAT & Customs Duty: Goodbye CHIEF, hello CDS

By   23 August 2022
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Businesses who import into the UK currently use Customs Handling of Import and Export Freight (CHIEF) to declare goods.

There is also a separate scheme running concurrently, known as Customs Declaration Service (CDS).

From 1 October 2022 CHIEF will cease and importers must use CDS.

Exports

CHIEF is also currently used for exports and this will continue to a later date of: 31 March 2023.

Action

This change will significantly affect all businesses which import goods. Although it is likely that import agents will handle the majority of issues, an importer will be required to:

Failure to comply with these requirements will result in a business being unable to import goods.

Claiming VAT incurred overseas

By   20 July 2022
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A UK VAT registered business is able to recover VAT it incurs in the EU. However, this is not done on the UK VAT return, but rather by a mechanism known as an “13th Directive” claim (Thirteenth Council Directive 86/560/EEC of 17 November 1986).

Via this procedure a UK business reclaims overseas VAT from the tax authority in the country it was incurred. This is different to the Retail Export Scheme.

Who can claim?

Any UK business which has a certificate of status and meets the following conditions:

The conditions

  • the UK business has not undertaken any business which would require it to register for VAT in the country in which the claim relates
  • a business must not have any fixed establishment, seat of economic activity, place of business or other residence (place of belonging) in the country of refund
  • a VAT invoice is obtained
  • the VAT was incurred for goods or services which give rise to the right of deduction (see below)

VAT not claimable

The following rules must be applied to a claim, and some claims are specifically refused:

Partial exemption

A business must apply the appropriate recovery rate for purchases using its partial exemption method.

Non-business expenses

Expenditure incurred in another country which relates to non-business activities is not claimable under the refund scheme.

Non-refundable supplies

VAT on the following supplies cannot be claimed

  • incorrectly invoiced
  • goods purchased which are subsequently exported

Further, the “usual” rules that apply to a UK VAT claim must be followed.

I have summarised what VAT is not claimable in each EU Member State here.

Minimum claim

Each country has a set minimum claim, but it is mainly around the €50 pa figure.

Time limit

Deadlines to request a refund are not standard and vary country to country. However, they are mainly 30 June or 30 September, and the claims are on a calendar year basis year (it is possible to make quarterly claims which have different deadlines).

How to make a claim

Claimants must send an application to the national tax authority in the country where the VAT was incurred.

Unfortunately, since Brexit, the claims procedure is more complex. There is no longer a single portal and the procedure to request refunds is not standard across the EU. A business needs to research the country specific information on VAT using links provided on the EU Taxation site and a claim for each country must be sent using the procedure set out by that country.

Full rules and procedure to follow can be found in Directive 86/560/EEC

Please note: Some countries require that a claim to be filed by a tax representative authorised by the local tax administration.

Time limits for the country of refund to process an application

The country of refund must notify the applicant of its decision to approve or refuse the application within four months of the date they first received the application.

Payment method

The refund will be paid in the country of refund or, at the applicant’s request, in any Member State. In the latter case, any bank charges for the transfer will be deducted by the country of refund from the amount to be paid to the applicant.

Penalties

All countries take a very serious view of incorrect or false applications. Refunds claimed incorrectly on the basis of incorrect or false information can be recovered and penalties and interest may be imposed, and further refund applications suspended.

Claims refused

If the country of refund refuses an application fully or partly it must notify a claimant of the reasons for refusal.

If this happens an appeal against the decision may be made using the appeals procedure of that country.

Interest on delayed applications

Interest may be payable by the country of refund if payment is made after the deadline. 

Claims on UK VAT returns

VAT incurred overseas must not be claimed on a UK VAT return.  If it is, it is liable to an assessment, penalties and interest levied in the UK by HMRC.

New VAT penalties and interest charges

By   18 May 2022
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Further to my article explaining the changes to late returns and payment penalties, HMRC has now published further guidance on new regime.

These changes, originally intended to be introduced on I April 2022 have been delayed until 1 January 2023 (for VAT periods starting on, or after, this date).

From 1 January 2023, HMRC will charge late-payment interest from the day a VAT payment is overdue to the day the VAT is paid, calculated at the Bank of England base rate plus 2.5%.

Period of familiarisation

HMRC say that to give businesses time to get used to the changes, it will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if the tax is paid in full within 30 days of the payment due date.

More on late returns here and on late payments here.

VAT treatment of deposits and advance payments

By   16 May 2022
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One query that constantly reappears is that of the VAT treatment of deposits.

This may be because there are different types of deposits with different VAT rules for each. I thought that it would be helpful for all the rules to be set out in one place, and some comments on how certain transactions are structured, so…

Broadly, we are looking at the tax point rules. The tax point is the time at which output tax is due and input tax recoverable. More on tax points here 

A business may have various commercial arrangements for payments such as:

  • receiving advance payments
  • being paid in instalments
  • credit sales
  • periodic payments for continuous supplies
  • security deposits for goods hired

I consider these below, as well as some specific arrangements:

Advance payments and deposits

An advance payment, or deposit, is a proportion of the total selling price that a customer pays a business before it supplies them with goods or services.

The tax point if an advance payment is made is whichever of the following happens first:

  • the date a VAT invoice for the advance payment is issued
  • the date you the advance payment is received

The VAT due on the value of the advance payment (only, not the full value of the overall supply) is included on the VAT return for the period when the tax point occurs.

If the customer pays the remaining balance before the goods are delivered or the services are performed, a further tax point is created when whichever of the following happens first:

  • the date a VAT invoice for the balance is issued
  • payment of the balance is received

So VAT is due on the balance on the return for when the further tax point occurs.

Returnable deposits

A business may ask its customers to pay a deposit when they hire goods. No VAT is due if the deposit is either:

  • refunded in full to the customer when they return the goods safely
  • kept by you to compensate you for loss or damage

Forfeit deposits

If a customer is asked for a deposit against goods or services but they then don’t buy them or use the services, it may be decided to retain the deposit. Usually the arrangement is that the customer is told/agrees in advance and it is part of the conditions for the sale. This arrangement is known as forfeit deposit. It often occurs when, for example, an hotel business makes a charge for reserving a room.

VAT should be declared on receipt of the deposit or when a VAT invoice is issued, whichever happens first.

HMRC announced via its Policy Paper Customs Brief 13 (2018) that the VAT treatment of forfeit, or “no-show” deposits changed from 1 March 2019.

The changes affect businesses that receive payments for services and part payments for goods and the customer does not:

  • use the service
  • collect the goods

Typically, this could be a hotel which reserves a room for a deposit which is retained if the customer is a no-show.

Previous treatment

Prior to 1 March 2019, charges for unfulfilled supplies and the retention of customer deposits are treated as outside the scope of VAT (and consequently VAT free). This is on the basis that either no supply had been made or, in the alternative, the retention of the deposit represents compensation for a loss, or the costs necessarily incurred.

Practically, this means that output tax is payable on the initial deposit, but this is adjusted if subsequently there is a no-show or goods are not collected.

Current treatment

From 1 March 2019, HMRC’s policy is that output tax is due on all retained payments for unused services and uncollected goods. Where businesses become aware that a customer has decided not to take up goods or services after paying, the transaction will remain subject to VAT. No adjustments or refunds of VAT will be allowed for those retained payments.

This means that when a non-repayable deposit is taken, VAT will always be due on the payment, regardless of subsequent events. However, if a deposit is returned, there will be no VAT due on it.

The rationale for the new treatment, according to HMRC is that; “because when a customer makes or commits to make a payment, it is for a supply. It cannot be reclassified as a payment to compensate the supplier for a loss once it is known the customer will not use the goods or services”

Continuous supplies

If a business supplies services on a continuous basis and it receives regular or occasional payments, a tax point is created every time a VAT invoice is issued or a payment received, whichever happens first. An article on tax planning for continuous supplies here

If payments are due regularly a business may issue a VAT invoice at the beginning of any period of up to a year for all the payments due in that period (as long as there’s more than one payment due). If it is decided to issue an invoice at the start of a period, no VAT is declared on any payment until either the date the payment is due or the date it is received, whichever happens first.

Credit and conditional sales

This is where the rules can get rather more complex.

  • A credit sale means the sale of goods which immediately become the property of the customer but where the price is paid in instalments.
  • A conditional sale is where goods are supplied to a customer but the goods remain the seller’s property until they are paid for in full.

The tax point for a credit sale or a conditional sale is created at the time you supply the goods or services to your customer. This is the basic tax point and is when you should account for the VAT on the full value of the goods.

This basic tax point may be over-ridden and an actual tax point created if a business:

  • issues a VAT invoice or receives payment before supplying the goods or services
  • issues a VAT invoice up to 14 days after the basic tax point

Credit sales where finance is provided to the customer

If goods are offered on credit to a customer and a finance company is not involved, the supplier is financing the credit itself. If the credit charge is shown separately on an invoice issued to the customer, it will be exempt from VAT. Other fees relating to the credit charge such as; administration, documentation or acceptance fees will also be exempt. VAT is declared on the full value of the goods that have been supplied on the VAT Return for that period.

If goods or services are supplied on interest free credit by arranging with a customer for them to pay over a set period without charging them interest then VAT is declared on the full selling price when you make the supplies.

Credit sales involving a finance company

When a business makes credit sales involving a finance company, the finance company either:

  • becomes the owner of the goods, eg; when a purchase is financed by a hire-purchase agreement
  • does not become the owner of the goods, eg; when a purchase is financed by a loan agreement

Hire purchase agreements

If the finance company becomes the owner of goods, the business is supplying the goods to the finance company and not the customer. There is no charge for providing the credit, so the seller accounts for VAT on the value of the goods at the time they are supplied to the finance company. Any commission received from the finance company for introducing them to the customer is usually subject to VAT.

Loan agreements

If the finance company does not become owner of the goods, the supplier is selling the goods directly to its customer. The business is not supplying the goods to the finance company, even though the finance company may pay the seller direct.  VAT is due on the selling price to the customer, even if the seller receives a lower amount from the finance company. The contract between the customer and the finance company for credit is a completely separate transaction to the sale of the goods.

Specific areas 

The following are areas where the rules on the treatment may differ

Cash Accounting Scheme

If a business uses the cash accounting scheme here it accounts for output tax when it receives payment from its customers unless it is a returnable deposit

Property

Care should be taken with deposits in property transactions.  This is especially important if property is purchased at auction.

These comments only apply to the purchase of property on which VAT is due (commercial property less than three years old or subject to the option to tax).  If a deposit is paid into a stakeholder, solicitor’s or escrow account (usually on exchange) and the vendor has no access to this money before completion no tax point is created. Otherwise, any advance payment is treated as above and creates a tax point on which output tax is due to the extent of the deposit amount. Vendors at auction can fall foul of these rules. If no other tax point has been created, output tax is due on completion.

Tour Operators’ Margin Scheme (TOMS)

TOMS has distinct rules on deposits.  Under normal VAT rules, the tax point is usually when an invoice is issued or payment received (as above).  Under TOMS, the normal time of supply is the departure date of the holiday or the first occupation of accommodation. However, in some cases this is overridden.  If the tour operator receives more than one payment, it may have more than one tax point. Each time a payment is received exceeding 20% of the selling price, a tax point for that amount is created. A tax point is also created each time the payments received to date (and not already accounted for) exceed 20% when added together. There are options available for deposits received when operating TOMS, so specific advice should be sought.

VAT Registration

In calculating turnover for registration, deposits must be included which create a tax point in the “historic” test.  Care should also be taken that a large deposit does not trigger immediate VAT registration by virtue of the “future” test. This is; if it is foreseeable at any time that receipts in the next 30 days on their own would exceed the turnover limit, currently £85,000, then the registration date would be the beginning of that 30-day period.

Flat Rate Scheme

A business applies the appropriate flat rate percentage to the value of the deposit received (unless it is a returnable deposit).  In most cases the issue of an invoice may be ignored if the option to use a version of cash accounting in the Flat Rate Scheme is taken. More on the FRS here and here

Please contact us if you have any queries on this article or would like your treatment of deposits reviewed to:

  • Ensure treatment is correct to avoid penalties, and/or;
  • Establish whether planning is available to properly defer payments of output tax under the tax point rules.

VAT: Global Accounting simplification

By   10 May 2022
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VAT: Second Hand Scheme  – Global Accounting simplification

Overview

The problem with the VAT Second-Hand Goods Scheme is that details of each individual item purchased, and then later sold, has to be recorded. This requirement can lead to a lot of paperwork and an awful lot of administration which, obviously, many businesses are not too keen to comply with.

Global Accounting is an optional, simplified variation of the Second Hand Margin Scheme (MS).

It differs from the standard MS because rather than accounting for the margin achieved on the sale of individual items VAT is calculated on the margin achieved between the total purchases and total sales in a particular accounting period without the requirement to establish the mark up on each individual item.  It is beneficial if a business buys and sells bulk volume, low value eligible goods, and is unable to maintain the detailed records required of businesses who use the standard MS.

There two significant differences in respect of Global Accounting compared to the standard MS. The first difference is that losses on an item are automatically offset against profits on items. Thus losses and profits are offset together in the period. In the standard MS no VAT is due if a loss is made on an item, but that loss cannot be offset against any other profit.  There is also a timing advantage with Global Accounting because all purchases made in the period are included, even if those goods are not actually sold in the same period.

Goods which may be included in Global Accounting

Global Accounting can be used for all items which are eligible under the standard MS.  However, the following goods cannot be included in Global Accounting:

  • individual items costing more than £500 (although these can be accounted for via the standard MS)
  • aircraft, boats and outboard motors,
  • caravans and motor caravans,
  • horses and ponies, and
  • motor vehicles, including motorcycles; except those broken up for scrap.

Starting to use the scheme

When a business starts using Global Accounting, it may find that it already has eligible stock on hand.  It may include the value of this stock when it calculates the total purchases at the end of the first period.  If a business does not take its stock on hand into account, it will have to pay VAT on the full price, rather than on the margin achieved, when it is sold.

Note: any goods bought on an invoice which shows a separate VAT figure are not eligible for resale under the scheme.

The calculation

VAT is calculated at the end of each tax period. Because you can take account of opening stock in your scheme calculations, you may find that you produce a negative margin at the end of several periods. In other words, your total purchases may exceed your total sales. In such cases, no VAT is due. But you must carry the negative margin forward to the next period as in the following example:

Period One

  1. a)      Total purchase value of stock on hand 10,000
  2. b)      Total purchases 2,000
  3. c)      Total sales 8,000

Margin = c – (a+b) = (4,000)

Because this is a negative margin there is no VAT to pay.  However, negative margin must be carried forward into the next period as follows:

Period Two

  1. a)      Negative margin from previous period 4,000
  2. b)      Total purchases 1,000
  3. c)      Total sales 7,000
  4. d)      Margin = c – (a + b), sales minus (purchases plus negative margin), £7,000 – (£1,000 + £4,000) 2,000
  5. e)      VAT due = margin (£2,000) × VAT fraction (1/6) 333.33

There is no negative margin to carry forward this time. Therefore, in the third period, the margin is calculated solely by reference to sales less purchases.

The negative margin may only be offset against the next Global Accounting margin. It cannot be offset against any other figure or record.

Global Accounting Records and Accounts

A business does not need to keep all the detailed records which are required under the normal MS – for instance, you do not have to maintain a detailed stock book.

Global Accounting records do not have to be kept in any set way but they must be complete, up to date and clearly distinguishable from any other records.  A business must keep records of purchases and sales as set out below, together with the workings used to calculate the VAT due.

If HMRC cannot check the margins declared from the records, VAT will be due on the full selling price of the goods sold, even if they were otherwise eligible for the scheme.

Buying goods under Global Accounting

When a business buys goods which it intends to sell under Global Accounting it must:

  • check that the goods are eligible for Global Accounting
  • obtain a purchase invoice. If a business buys from a private individual or an unregistered entity, the purchaser should make out the invoice at the time the goods are purchased.  If purchased from another VAT-registered dealer, the dealer must make out the invoice at the time of sale, and
  • enter the purchase details of the goods in your Global Accounting purchase records.  The purchase price must be the price on the invoice which has been agreed between you and the seller.

You cannot use the scheme if VAT is shown separately on the invoice.

If you are buying from a private individual or an unregistered business, you must make out the purchase invoice yourself.

When selling goods under Global Accounting

If the purchase conditions above apply, Global Accounting may be used when the goods are sold by:

  • recording the sale in the usual way
  • issuing a sales invoice for sales to other VAT-registered dealers and keeping a copy of the invoice, and
  • transferring totals of copy invoices to the Global Accounting sales record or summary
  • you must be able to distinguish at the point of sale between sales made under Global Accounting and other types of transaction

Leaving the scheme

If a business stops using Global Accounting for any reason, it must make a closing adjustment to take account of purchases for which it has taken credit, but which have not been sold (closing stock on hand). The adjustment required does not apply if the total VAT due on stock on hand is £1,000 or less. In the final period for which the business uses the scheme, it must add the purchase value of its closing stock to the sales figure for that period.  In this way VAT will be paid (at cost price) on the stock for which the business previously had credit under the scheme.

Items sold outside the scheme

If goods are sold which had been included in a business’ Global Accounting purchase (for example, they are exported), a business must adjust its records accordingly.  This is done by subtracting the purchase value of the goods sold outside the scheme from the total purchases at the end of the period.

Stolen or destroyed goods

If a business loses any goods through breakage, theft or destruction, it must subtract their purchase price from your Global Accounting purchase record.

Repairs and restoration costs

A business may reclaim the VAT it is charged on any business overheads, repairs, restoration costs, etc. But it must not add any of these costs to the purchase price of the goods sold under the scheme.

For further advice on any global accounting, used goods schemes, or any other special VAT schemes please contact me.

VAT: Updated Road Fuel Scale Charges from 1 May 2022

By   25 April 2022
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Access the updated VAT Fuel Scale Charges to apply from the 1 May 2022 here They will apply VAT periods starting on or after that date.

HMRC has published new VAT Road Fuel Scale Charges (RFSC) which apply from 1 May 2022 to 30 April 2023.

RFSC

If a business reclaims VAT incurred on road fuel, it will be required recognise the private use element of the fuel.

The RFSC simplifies accounting for VAT on the private use of fuel by motorists. The RFSC is calculated according to a car’s CO2 emissions and the fixed charge is added to output VAT, on the VAT return (in effect, the business supplies to fuel to the individual). The use of this charge is optional, the alternative is to keep detailed mileage records.

Details of these, and other motoring expenses here.

A quick RFSC calculator/ready-reckoner here.

VAT: Mind the gap

By   28 March 2022
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HMRC has published details of the VAT gap for 2020 – 2021.

The VAT Gap

The VAT gap is measured by comparing the net VAT total theoretical liability with tax actually paid. This is comparing the amount of VAT HMRC expected to receive in the UK and the VAT HMRC actually received.

The figures

The net VAT theoretical liability £129 billion

Net VAT received £101.7 billion

Net VAT receipts related to net VAT total theoretical liability £120.4 billion

VAT gap £8.6 billion

The VAT gap is therefore 6.7%.

Notes

The 2020 to 2021 net receipts figure in the VAT gap includes an adjustment for payments that were deferred in 2020 under the VAT Payments Deferral Scheme in response to Covid-19. They also reflect reduced VAT rates for the hospitality sector, holiday accommodation and attractions, and zero rate for personal protective equipment.

Methodology

Information on the method used to estimate the VAT gap is here for those interested (I don’t imagine that there will be that many…).

Reduction

The estimate of the VAT gap for 2020 to 2021 £8.6 billion shows a reduction compared with the estimate of the VAT gap for 2019 to 2020 which was £12.3 billion.

Previous year’s VAT gap figures for comparison here.

This seems to be an awful amount of tax which has “gone missing”.

VAT: Avoiding a Default Surcharge. Reasonable Excuse – Update

By   14 March 2022
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I have looked at the Default Surcharge regime in detail here but as statistics show more business to be in default (which is probably accurately attributable, inter alia, to the pandemic) I consider how a penalty may be mitigated, by the provision of a “Reasonable Excuse”. HMRC has updated its internal guidance on Reasonable Excuse this month.

Specifically: HMRC state that “…where a person has not been able to meet an obligation on time due to the impact of COVID-19, HMRC will usually accept that they will have a reasonable excuse.”

What is a Default Surcharge?

The Default Surcharge is a civil penalty issued by HMRC to encourage businesses to submit their VAT returns and pay the tax due on time.

A default occurs if HMRC has not received your return and all the VAT due by the due date. The relevant date is the date that cleared funds reach HMRC’s bank account. If the due date is not a working day, payment must be received on the last preceding working day.

More on late returns here and on late payments here.

New rules forthcoming

It is noted that there is a new regime for penalties, details here although these changes have been delayed until 1 January 2023

Reasonable Excuse

If a business has a reasonable excuse for failing to pay on time, and it remedies this failure without unreasonable delay after the excuse ends, it will not be liable to a surcharge. The onus is on a business to satisfy HMRC that it has a Reasonable Excuse.

Definition

There’s no statutory definition of Reasonable Excuse and it will depend on the particular circumstances of a case. A Reasonable Excuse is something that prevented the business meeting a tax obligation on time which it took reasonable care to meet. There is a great deal of case law on this particular issue. Please contact us should there be doubt about a Reasonable Excuse.

What may count as a Reasonable Excuse?

HMRC give the following examples:

  • “your partner or another close relative died shortly before the tax return or payment deadline
  • you had an unexpected stay in hospital that prevented you from dealing with your tax affairs
  • you had a serious or life-threatening illness
  • your computer or software failed just before or while you were preparing your online return
  • service issues with HMRC online services
  • a fire, flood or theft prevented you from completing your tax return
  • postal delays that you could not have predicted
  • delays related to a disability (including mental health) you have”

This list is not exhaustive.

What is NOT a reasonable excuse

Statute identifies two specific situations that are not a reasonable excuse:

  • lack of funds to pay any VAT due, or
  • reliance on any other person to perform a task, where there has been a delay or inaccuracy on that person’s part.

There can be exceptions to these two exclusions. For example, an insufficiency of funds may be a reasonable excuse where the insufficiency is a result of events outside the person’s control.

HMRC also states that these situations would not normally be accepted, on their own, as a reasonable excuse:

  • pressure of work
  • lack of information
  • lack of a reminder from HMRC

Facts

HMRC will establish what facts the business believes gave rise to a Reasonable Excuse. The facts may include:

  • the taxpayer’s beliefs
  • the taxpayer’s own experiences and relevant attributes
  • the situation of the taxpayer at any relevant time
  • acts carried out by the taxpayer or someone else
  • acts that the taxpayer or someone else should have carried out but did not.

Case Law

Although not a VAT issue, in the Upper Tribunal (UT) case of Christine Perrin [2018] UKUT 156 [TC], the judge provided guidance on how the Tribunal should approach a Reasonable Excuse defence. There are four steps:

  1. establish what facts the taxpayer asserts give rise to a reasonable excuse
  2. decide which of those facts are proven
  3. if those proven facts amount to an objectively reasonable excuse for the default
  4. having decided when any reasonable excuse ceased, decide whether the taxpayer remedied the failure without unreasonable delay after that time

Appeal

If HMRC refuse to accept an advance of a Reasonable Excuse and the Default Surcharge is maintained, there are two potential remedies:

If a business disagrees with a decision that it is liable to a surcharge or how the amount of surcharge has been calculated, it is possible to:

  • ask HMRC to review your case (A Statutory Review)
  • have your case heard by the Tax Tribunal

If you ask for a review of a case, a business will be required to write to HMRC within 30 days of the date the Surcharge Liability Notice Extension (SLNE) was sent. The letter should give the reasons why a business disagrees with the decision.

We are able to assist with all disputes with HMRC and have an enviable record of succeeding in having Default Surcharges removed.

VAT: Late payment and repayment interest rates

By   21 February 2022
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The current late payment and repayment interest rates applied to the main taxes and duties that HMRC currently charges and pays interest on are:

  • Late payment interest rate — 3.0% from 21 February 2022
  • Repayment interest rate — 0.5% from 29 September 2009

Interest rates for all other taxes here.

Details of default surcharge here.

VAT: Latest on early termination and compensation payments

By   8 February 2022
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HMRC has published a new Revenue and Customs Brief 2(2022) which replaces Revenue and Customs Brief 12 (2020): VAT early termination fees and compensation payments.

It introduces a revised policy on early termination payments and compensation fees. Following representations from industry the Brief issued in September 2020 was suspended in January 2021. HMRC has reviewed the policy in the light of those representations and is adopting a revised policy which will take effect from 1 April 2022. The new policy will result in fewer early termination payments being subject to VAT than in the 2020 guidance.

The new Brief also advises businesses that adopted the treatment outlined in Brief 12 (2020) on what action they should now take.

Background

Whether a payment is for a VAT supply depends on whether anything is being done in return for a consideration. Where a party agrees to do something in return for a fee there is a supply. How that fee is described does not affect whether there is a supply for VAT. What matters is whether something is done and if there is a direct link between what is done and the payment received, and reciprocity between the supplier and the customer (see VATSC05100).

Previous HMRC guidance stated that when customers are charged to withdraw from agreements to receive goods or services, these charges were not generally for a supply and were outside the scope of VAT.

Following the Court of Justice of the European Union (CJEU) judgments in Meo (C-295/17) and most recently in Vodafone Portugal (C-43/19), it is evident that some of these charges are additional consideration for the supply of goods or services. Most early termination fees and some cancellation fees are therefore liable for VAT if the goods or services for which the fees have been paid are liable for VAT, even if they are described as compensation or damages.

The main impact 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.

The new guidance can be found at VATSC05910, VATSC05920 and VATSC05930.