VAT added to mobile termination fees

On 2 September 2020, HMRC published guidance to treat early contract termination fees, including payments on a breach or withdrawal of a contract and liquidated damages, as subject to VAT.

Historically, HMRC’s published view was that payments charged to customers to withdraw from agreements to receive goods or services were not generally for a supply and were therefore outside the scope of VAT.

This affects the business mobile industry as now most payments arising from an early termination of such contracts will now be treated as consideration for a taxable supply and therefore be subject to VAT.

In considering whether payments will now be subject to VAT, HMRC has stated it is irrelevant whether:

  • the original contract has a right to terminate (previously, HMRC distinguished between contracts that contained a right to terminate and those that did not);
  • such payments are described as compensation or damages; or
  • the amount payable is equal to the amount that would have been due had the contract been fulfilled.

Only where there is no direct link between a payment and a supply of goods or services will the payment be outside the scope of VAT. We will keep you abreast of how this might affect your business mobile account.

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