Windows 10 VM Hyper-V Guest processing skipped on Host W2K12R2

Guest Windows 10 VMs will fail to engage VSS when application-aware image processing is enabled generating an error:
Error    Guest processing skipped (check guest OS VSS state and integration components version) (System.Exception)
 

Integration services on Windows 10 VM are newer than the integration services on the host and not (or at least at this point) backwards compatible. You can verify this by opening Hyper-V host Event Viewer and go to:
 
Event Viewer -> Applications and Serivces Logs -> Microsoft -> Windows -> Hyper-V Integration -> Event ID 4000



If you log into the VM and try to update the integration services, you will get a message:


 

Disable application aware image processing for the Windows 10 VM and use "Hyper-V quiescence" instead or engage Microsoft for further information regarding integration services compatibility.

Note: In some cases this issue might occure when guest OS is Windows Server 2016. 
If this is the case ensure that all updates are installed on host and guest OS.
If this doesn't resolve the issue, you might want to uncheck 'guest services'.
 

For more information on "Hypver-V quiescence" please go to our Helpcenter.