New guidance on VAT and early termination fees and clarification on zero VAT rating of digital ads for charities

New guidance on VAT and early termination fees

HMRC has changed their guidance for businesses charging customers a fee to withdraw from a supply agreement, following decisions in the EU Court of Justice.

Previous guidance specified that when customers are charged compensation or early termination fees as part of a contract, these charges were outside the scope of VAT as they were not generally for a supply.

However, the new guidance states these charges are generally liable for VAT.

Any taxable person that has not accounted for VAT on these fees should rectify the error using the normal procedures. However, if a particular ruling has been received from HMRC that such fees are outside the scope of VAT, the taxable person should only account for VAT on such fees received after 2 September 2020.

Zero VAT rating of digital ads for charities

HMRC’s latest guidance explains when zero-rate VAT applies for advertising services supplied by a third party to a charity. When services are designed for the general public the zero-rate applies unless the member of the public has been selected by or on behalf of the charity to receive the advertising.

Zero-rate applies to the following, subject to all other conditions being met:

• audience targeting
• behavioural targeting
• channel targeting
• content targeting
• daypart targeting
• demographic targeting
• device targeting
• direct placements on third party websites
• location targeting
• lookalike targeting
• pay-per-click adverts
• retargeting

Standard rate applies to:

• Email advertising
• Natural hits
• Social media/ subscriptions website accounts

Where the advertisement qualifies for zero-rate VAT, copyright, design, and production services will also qualify.

Zero-rate VAT does not apply to any services that involve the optimisation of the charity’s website, such as services supplied by copywriters for the purpose of search engine optimisation.