Contract termination payments – VAT Act.

Magdalena Szczepańska, Dawid Przeździak
Puls Biznesu

Early termination of a contract may have various reasons and, thus, various consequences. Where a contract is terminated due to the fault of a party to it, the other can receive a related payment, such as liquidated damages or contractual penalty, which does not constitute consideration for a supply of any goods or services and as a rule is not subject to VAT. But a contract may also be terminated upon the consent of both parties, who decide to mutually make certain termination payments or supplies which meet the definition of a supply of goods or services for consideration. In such a case of early termination the value of such mutual supplies is subject to VAT. Both matters are discussed in the article by reference to tax rulings.