VAT is due on early termination fees and compensation payments
HMRC have released new guidance which states that any early termination or cancellation fees; or compensation paid as part of a contract is liable for VAT.
Previously, HMRC guidance advised that where fees were charged for early termination, they would not be subject to VAT as they were not for a supply of goods. Following the Court of Justice of the European Union (CJEU) judgments in a case, the Revenue have changed their policy to follow the ruling which means that charges or fees are normally considered as being for the supply of goods or services and therefore should be subject to VAT.
The HMRC briefing paper on the new guidance can be found here.