Money received is not automatically consideration for a taxable supply of goods or services.
Generally, for there to be an output tax liability, there must be a taxable supply made in the UK by a taxable person in the course or furtherance of any business carried on by him (VATA 1994, s. 4(1)). If the payment is not made in the course or furtherance of a business, or is not for a taxable supply, no VAT is due.
‘Compensation’ is outside the scope of VAT but there is an important distinction to be made between
•payments described as ‘compensation’ but related to a specific supply that may, in fact, be taxable and;