HMRC announces changes to VAT on early contract terminations

HMRC has announced UK VAT is payable on most early contract termination and cancellation fees, in a change to its previous practice.

The tax authority said following recent judgements of the European Court of Justice, it is “evident that these charges are normally considered as being for the supply of goods or services for which the customer has been contracted”.

Therefore, most early termination and cancellation fees, such as those incurred when upgrading a mobile phone package or handset, are liable for VAT.

This update differs from previous HMRC guidance, which said these charges were “not generally for a supply and were outside the scope of VAT”.


HMRC added this does not affect the tax treatment of full or part-payments made on account for a taxable supply.


It said anyone who has failed to account for VAT on these fees should correct the error by amending their VAT return. 


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