On 1 April 2022, HMRC introduced a new policy that VAT is generally due on charges for early termination of a contract for goods or services. This replaced its previous position that some early termination charges were not subject to VAT because they were a compensation payment made from the customer to the supplier.
HMRC has now set out its view on the effect of its new policy on charges relating to the termination of vehicle leases, which was hidden away in an update to its guidance on motoring expenses (VAT Notice 700/64). HMRC says that the fees charged for terminating a contract early are now regarded as further consideration for the contracted supply. Therefore, if a vehicle lease is terminated early, the leasing company must treat the termination payment and any associated rebate of rental as taxable for VAT purposes because it is an additional charge for the rental of the car.
Source RSM
