There has been an introduction of a revised policy on the VAT treatment of early termination fees and compensation payments by HMRC by the publication of Revenue and Customs Brief 2 (2022). This will be taken into consideration from April 1, 2022. This would be used instead of the guidance that was suspended in the month of January.
The latest policy of HMRC is that most early termination fees and some cancellation fees would be accountable for VAT if the goods or services for which the fees have been met are accountable for VAT even if they are mentioned as compensation or damages.
The new guidance can be found in HMRC’s VAT Supply and Consideration Manual. The earlier guidance and the September 2021 version has have been removed. The timeline function on the National Archives website has earlier versions of guidances if needed in case of emergencies.
The changed policy must be adopted by all the businesses by 1st April 2022. This includes any taxable person that has had a specific ruling from HMRC stating that such fees are outside the scope of VAT.