VATSC05910 – Consideration: Compensation and liquidated damages that are consideration: When are compensation payments consideration for a supply?
Whether a payment is for a VAT supply depends on whether anything is being done in return for a consideration. Where a party agrees to do something in return for a fee there is a supply. How that fee is described does not affect whether there is a supply for VAT. What matters is whether something is done and if there is a direct link between what is done and the payment received, and reciprocity between the supplier and the customer (see VATSC05100).
Source gov.uk
VATSC05920 – Consideration: Compensation and liquidated damages that are consideration: Compensation payments: Early termination of contracts
HMRC’s policy is to treat payments arising out of early contract termination as further consideration for the contracted supply where the payments are linked to that supply, which will normally be the case. Businesses must account for VAT on these fees if the supply is taxable at the same rate of VAT as the supply. This applies in cases where the original contract allows for such a termination, as well as when a separate agreement is reached.
Source gov.uk
VATSC05930 – Consideration: Compensation and liquidated damages that are consideration: Liquidated damages
Agreements that allow for early termination will invariably include related clauses that provide a formula for payment of compensation in the event of such termination. These amounts are generally expressed as being compensation for loss of earnings and are often referred to as liquidated damages. In the light of MEO and Vodafone Portugal these need to be considered carefully to determine whether they are consideration for supplies (see VATSC05910 and VATSC05920).
Source gov.uk
See also Roadtrip through ECJ cases: Focus on ”Termination/cancellation fees”
