Cancellations, dissolutions, and terminations of agreements occur regularly, particularly during the COVID-19 pandemic. Some situations may give rise to cancellation and/or dissolution fees. The VAT treatment of such fees is difficult. The question is whether VAT is owed on such fees because it is considered part of the compensation for the performance of services to be rendered, or whether the fee is untaxed compensation.
The EU Court of Justice (ECJ) recently ruled on this issue in the Vodafone Portugal case. The case concerned a situation where a customer could no longer fulfil its obligations under a contract. Subsequently, the customers in question had to pay the amounts laid down in the agreements. In dispute was whether Portuguese VAT was due on these amounts paid. The ECJ ruled in this case that amounts received by an economic operator in the event of early termination of a services contract requiring compliance with a tie-in period in exchange for granting that customer advantageous commercial conditions must be considered to constitute remuneration for a supply of services for consideration.
The judgment of the ECJ in the Vodafone Portugal case provides some further clarification in relation to previous case law of the ECJ (for example MEO, Société thermale d’Eugénie-les-Bains, and Air France-KLM) concerning the VAT treatment of an amount charged in the event of early termination of a contract. In this article, we provide an overview of the circumstances based on the case law of the ECJ (as mentioned above) that play a role in answering the question of whether a cancellation or dissolution fee is subject to VAT when a customer decides to no longer use your product or service.
Whether VAT is due on a cancellation or dissolution fee depends on the facts of the specific situation. The chart below shows some of the factors that play a role in determining whether a cancellation or dissolution fee is subject to VAT. Because the VAT consequences are highly dependent on the specific situation, we recommend you always contact your VAT adviser to discuss the matter. The chart below is meant to provide only an overview of the factors to weigh.
|
Factors |
The fee is subject to VAT |
The fee is not subject to VAT |
|---|---|---|
|
Has the customer paid the full amount? |
Yes |
No |
|
Has the customer paid only an amount in advance? |
No |
Yes |
|
Are you entitled to keep the full amount of the cancellation fee if the customer cancels at any point in the contract period? |
Yes |
No |
|
Is the customer obligated to pay the rest of the full amount of the cancellation fee, when he or she has only paid an amount in advance? |
Yes |
No |
|
Has the customer already obtained the right to make use of the service you have offered? |
Yes |
No |
|
Is the amount you are allowed to keep intended as compensation for damages suffered? |
No |
Yes |
|
Is the amount of, or the method of calculation of, the dissolution or cancellation fee already determined in the concluded contract? |
Yes |
No |
|
Do the terms of the agreement deem the sale final or binding at a point prior to the dissolution, cancellation, or termination? |
Yes |
No |
Especially during this COVID-19 period, the liquidity of entrepreneurs is under pressure. It is, therefore, important that entrepreneurs not waste any money. The VAT included in the compensation that you have already received from the customer, but which you refund to the customer due to cancellation, can, in any case, be reclaimed. Of course, you must satisfy conditions to do so. If you have already invoiced the customer, we advise you to issue a credit invoice. If the part of the compensation that you are allowed to keep qualifies as compensation, you can also claim a refund of VAT for that part. As indicated, this will depend on the facts of the specific situation.
Madeleine Merkx
madeleine.merkx@bdo.nl
Anne Janssen
anne.janssen@bdo.nl