VAT treatment of termination payments

At its heart VAT is a straightforward tax on consumption. Suppose a modern day Oscar Wilde (a long-time resident of Chelsea) buys a suit from Liberty (a VAT-registered shop) and is charged an amount plus VAT. He wears that suit to a meeting with his solicitor who is advising him about his libel action and he is charged an amount plus VAT for the meeting.

If his libel action succeeded and he won damages that would be pure compensation; it would not be a payment for a VATable supply by Oscar Wilde and no consumption by the payer of the damages. But VAT can seemingly depart from those basic principles quickly and sometimes a recipient may find they are being charged VAT when neither the supplier and recipient is anticipating a VATable supply.

Core principles

Before being too outraged by either – or both – of the recent Revenue &...