Contract termination fees can be incredibly frustrating when you want to get out of an expensive agreement. This is made even worse when suppliers charge VAT on top of their cancellation fees, particularly when you know that others are not.

In the past, the law regarding this has been very unclear; however, HMRC has now implemented firm guidance on how termination fees should be treated in terms of VAT. This will be in place from the 1st of April 2022.

What Does The New Guidance Involve?

The new guidance states that any fee paid on the early termination of a contract should follow the VAT treatment of the main supply under that contract.

If your business charges a cancellation fee, whether it be a gym membership or function room hire, you will need to review your VAT policy to ensure that it is compliant with the new HMRC guidance. Our team can help you with this, so please get in touch to discuss further.

For those planning on terminating a contract early and are expecting to pay a cancellation fee, we recommend doing this before the 1st of April 2022. However, don’t forget to speak with your supplier first to find out their charges and whether they will add VAT on top.