Readers’ forum: Does termination fee create VAT registration problem?

One of my cleaning contractor clients has an unusual VAT question. The business is not registered for VAT because it only has two annual contracts – one for £20 000 and the other is for £60 000 – less than the registration threshold of £90 000.

It has recently lost its biggest contract because the business customer has relocated to a different part of the UK; the customer has agreed to pay £100 000 to my client to terminate the contract early; it was a rolling three-year agreement.

The question I have is whether the receipt of the £100 000 payment means that my client must register for VAT under the forward-looking test ie treat the receipt as standard rated. I have received conflicting advice: one colleague said that it is non-VATable because the cleaning supplies were not subject to VAT but another colleague said that it relates to work that...