VAT on cancellation fees
Following the COVID-19 shutdown, many businesses are reviewing their overhead costs, such as rent, power, security and IT systems. If you want to cancel a contract for one of those services before the termination date, the supplier may charge you a cancellation or early termination fee.
Until recently HMRC viewed cancellation fees as being outside the scope of VAT, so the charge did not bear VAT. However, on 2 September 2020 HMRC changed its guidance, so now all cancellation fees should carry VAT just as it would apply to the underlying service.
What’s more, the change in VAT treatment has to be back-dated four years, unless the supplier has a specific ruling from HMRC to say the cancellation fee is outside the scope of VAT.
If you have charged termination or cancellation fees in the last four years, you should review the circumstances of each fee, and correct your VAT returns to pay the additional VAT to HMRC. We can help you with that.
If you have paid a cancelation fee in the past, normally the supplier won’t charge you any additional VAT, but that will depend on the precise wording of the contract.