HMRC have recently published a policy paper that looks at VAT charges on early termination fees and compensation payments.
The brief gives an update on how VAT should be treated on these payments following recent judgements in the Court of Justice of the European Union (CJEU) in Meo (C-295/17) and more recently in Vodafone Portugal (C-43/19).
VAT is a tax on the supply of a service or goods and is applied to your regular lease payments, but previously would not have been charged if you had proceeded with an early termination on the contract.
Previous guidance said that when you were charged to end an agreement then this was outside the scope of VAT. However, following on from the CJEU rulings HMRC have now advised that VAT would be applicable.
HMRC have advised this does not affect the tax treatment of full or part payments made on account for a taxable supply, which is explained in Revenue and Customs Brief 13/18. Businesses making supplies subject to the Tour Operators’ Margin Scheme, can find out more information in the Revenue and Customs Brief 09/19.
This means that going forward early terminations on lease vehicles should now include VAT.
If you have any questions about how this could affect you please give us a call on 0330 221 0000.