In September 2020, HMRC issued a brief announcing a controversial new policy on the VAT position of early termination fees and compensation payments. Having generally accepted in the past that such amounts were not subject to VAT, HMRC formed the view (based on two European court judgments in C-295/17 MEO and C-43/19 Vodafone Portugal that charges made to customers who withdraw from agreements are payment for the supply of goods or services which the customer has contracted for. Therefore, HMRC said they were subject to VAT, even if they are described as compensation or damages.
Source RSM
See also Roadtrip through ECJ cases: Focus on ”Termination/cancellation fees” (Art. 90)
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