VAT on dilapidations

Anyone dealing with dilapidation claims knows that VAT does not normally apply to the settlement figure paid, right? Well, perhaps not! It seems that HMRC are making a sharp U-turn on the established principle.

The application of VAT on transactions involving land and buildings is covered by HMRC Notice 742 Section 10.12, which states that a dilapidation payment is “not the consideration for a supply for VAT purposes and is outside the scope of VAT”.

There are, of course, grounds where a Landlord’s dilapidation claim may include an amount equivalent to VAT if they will expend the sum on remedying the defects but cannot recover the amount; however, VAT is not chargeable on the settlement figure paid. In essence, we have been operating under a tax regime where dilapidation payments are treated as compensation (damages) and not a supply, so VAT does not apply to the settlement figure paid.

In September of last year, HMRC’s view seemed to be changing, with the release of revenue and Customs Brief 12(2020) VAT on Early Termination Fees and Compensation Payments. The position followed two recent judgements made by the Court of Justice of the European Union. The new stance taken by HMRC being that compensation or early termination charges would be treated as fees paid under a contract and therefore should be liable for VAT.

The question of whether dilapidation payments will be covered by the new VAT rules has been left somewhat vague by HMRC. The brief did not specifically deal with dilapidations, only compensation payments in a broader sense. So, what now? Well, HMRC are planning to issue revised guidance on the subject and, after lobbying property industry bodies, their intention seems to be that VAT will be applicable to dilapidation payments, effective from 1st February 2021.

The expectation is that the new VAT guidance will be released by HMRC during January 2021 so both Landlords and Tenants should be prepared for a change where VAT may now be chargeable on dilapidation settlements.

If you are interested in this or having any queries regarding VAT or dilapidations, contact Colin at colin.wilson@tridentbc.com, or call him on 07917 776980.

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