HMRC has made a significant change in its established position on the treatment of contractual termination payments and contractual liquidated damages. HMRC say that this reflects the decision of the ECJ in Vodafone Portugal (Case c-43/19) and and its earlier decision in MEO, and has removed its existing guidance. However, these decisions were confined to early termination payments under fixed term services contracts, where it was held that these payments were consideration for the taxable supply of services. HMRC's change of interpretation seems to go significantly beyond either decision. It is also not confined to future contracts - it will affect existing contracts entered into on the basis of HMRC's former interpretation and, based on the wording of the Business Brief, previous settlements still within the 4 year time limit. Unless a specific ruling has been obtained from HMRC, HMRC expects taxpayers to treat the original filing position, as an error, even when it was based on HMRC's previous guidance. This will be expensive for some businesses, and for others disentangling the position will be complex, as they will need to consider the overall impact on recovery for an entity or group, and whether, contractually, the burden of any adjustment falls on the payer or recipient. It is also not entirely clear how far HMRC intend to push the principles set out here, but it looks as though the intention is to apply this treatment to any case of contractual liquidated damages.

"Following the CJEU judgments in Meo (C-295/17) and most recently in Vodafone Portugal (C-43/19) it is evident that these charges are normally considered as being for the supply of goods or services for which the customer has been contracted for. Most early termination and cancellation fees are therefore liable for VAT. This is the case even if they are described as compensation or damages." 

"Any taxable person that has failed to account for VAT to HMRC on such fees should correct the error. Any taxable person that has had a specific ruling from HMRC saying that such fees are outside the scope of VAT should account for VAT on such fees received after the issue of this Revenue and Customs Brief."

https://www.gov.uk/government/publications/revenue-and-customs-brief-12-2020-vat-early-termination-fees-and-compensation-payments/revenue-and-customs-brief-12-2020-vat-early-termination-fees-and-compensation-payments