HMRC’s previous long-standing guidance was that when customers were charged to withdraw from agreements to receive goods or services, these charges (including liquidated damages) were not generally payment for a supply, and were therefore outside the scope of VAT.

Only where a separate agreement was needed to allow for the right to terminate were payments subject to VAT. But in September 2020’s Revenue & Customs Brief 12/2020, HMRC announced that in light of recent European VAT cases, its revised view is that charges for compensation or early contract terminations, including liquidated damages, should be treated as consideration for a supply, and therefore most payments are subject to VAT at the standard rate.