HMRC internal manual https://www.gov.uk/hmrc-internal-manuals/vat-supply-and-consideration/vatsc06730
VAT Supply and Consideration
Breach of contract. It is also possible for leases and other agreements to terminate early if a particular event occurs such as the customer breaching the terms or the lessee or an associate business calling in receivers. The contract deems that such events cancel its terms or effectively allow the lessor to terminate as though there had been a breach. Again, any moneys deemed due as a result are damages and outside the scope of VAT.
- There is no supply for VAT purposes of “the right to terminate” or other such service where a contract originally contains a clause allowing the parties to terminate early in lieu of compensation for perceived losses arising from the termination.