VAT on termination fees

Written by yasiradnan94
21 April 2022

Contract termination fees can be a bitter pill to swallow when you just want out of an expensive agreement. What’s worse is that some suppliers will charge VAT on top of the cancellation fee while others will not.

The law has been a bit of a mess but HMRC has laid down firm guidance on how termination fees should be treated for VAT purposes from 1 April 2022. From this date any fee paid on the early termination of a contract should follow the VAT treatment of the main supply under that contract.

Where your business charges cancellation fees, say for gym membership, hiring of rooms or restaurant tables, you need to review your VAT policy to ensure that it is in line with the new HMRC guidance from 1 April. We can help you with this.

If you are planning to terminate a contract early, which would create a cancellation fee, consider doing this before 1 April 2022. But first ask your supplier about the level of the charges and whether they intend to charge VAT on top.

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