In September 2020, HMRC released Revenue and Customs Brief 12 (2020). This guidance brief sets out proposed changes to the VAT treatment of dilapidations claims following recent judgements in the EU Court of Justice.
The Brief suggested that a payment from a customer to a supplier (even as compensation) is a further consideration for the original supply and so liable for VAT if the original supply was.
Whilst HMRC’s brief did not specifically mention dilapidations, the principles outlined in it suggest that dilapidations would be subject to VAT if the underlying agreement is also VAT chargeable. This would apply in instances where a lease is subject to an option to tax, for example.
These changes left many scratching their heads about the possible treatment of dilapidations payments and whether they will be subject to VAT.
Latest Update from HMRC on Dilapidations & VAT
Fortunately, in January 2021 HMRC revised its advice. They promised further guidance at some future date. Until then businesses can either :
- continue to treat such payments as further consideration for the contracted supply; or
- go back to treating them as outside the scope of VAT, if that is how they treated them before this brief was issued.
HMRC circulated a draft of the promised revised guidance in August 2021. They requested that any comments were sent to them by the end of the month.
The draft guidance states :
‘Our policy having weighed these factors is not to treat dilapidations payments as further consideration for the supply of a lease. We might depart from that view if in individual cases we found evidence of value shifting from rent to dilapidations payment to avoid accounting for VAT’
This supports the position in section 10.12 of HMRC’s Land and property (VAT Notice 742), revised in December 2020, which states :
‘A dilapidation payment represents a claim for damages by the landlord against the tenant’s ‘want of repair’. The payment involved is not the consideration for a supply for VAT purposes and is outside the scope of VAT’
Based on HMRC’s latest views most landlords and tenants acting on normal commercial terms will now have some certainty and know that VAT is not charged on dilapidations payments.
For any further help or advice, please call our Enquiry Line on 020 4534 3132, or contact a member of the team direct, details below:
BSc (Hons) MRICS