Written by: David Wilson

David Wilson

Technical Associate Director

Telecoms and broadband providers face VAT charges on early termination fees

Early termination fees, charged by providers of telecoms and broadband services, should be subject to VAT.

This is the conclusion of a senior EU lawyer when he considered the case of Portuguese telecoms and multimedia provider MEO, and which could have ramifications for UK telecoms and broadband providers if his opinion is followed by the European Court. 

When someone terminates their telecoms or broadband contract early, either because they are switching providers, moving home or struggling with the monthly contractual terms, they are charged an early termination fee, typically depending on how many months of their contract they have left.

In the UK, as in the case of MEO in Portugal, the providers typically treat these payments as compensation for damages - ie, the loss of profit over the full term of the contract - and therefore outside the scope of VAT.

The Advocate General to the CJEU however considers that if the payments do not directly relate to the repair or loss of property, then early termination payments are not compensation, but should just be seen as further payments for services already provided under that contract, and therefore subject to VAT.

There have been numerous instances of late where Ofcom, the UK’s telecoms regulator, has investigated telecoms and broadband providers where it has considered that exit fees charged by some providers have acted as a disincentive to customers switching providers. 

Although the Advocate General’s Opinion is not binding on the CJEU, if the Court does follow the Advocate General’s lead, UK providers could find that HMRC is also interested in early termination charges.

As Ofcom’s view is that early termination fees should never be more than the amount that consumers would have paid if they had fulfilled their minimum contract term, it is unlikely that providers would be able to pass on any VAT charges to their customers.

The date of the final judgement of the CJEU has yet to be confirmed, but no doubt telecoms and broadband providers in the UK will be anxious of the outcome.

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