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Lawbite: VAT liability on dilapidations

  • United Kingdom
  • Litigation and dispute management
  • Real estate
  • Real estate litigation - LawBite

30-09-2021

HMRC Brief 12 (2020)

In September 2020 HM Revenue & Customs indicated a change of approach to the VAT treatment of compensation and termination payments by issuing Brief 12 (2020).  Due to the fairly widely drawn wording of the policy paper it was unclear whether, as a result of this Brief, dilapidation payments would fall within the scope of VAT. Such payment having historically been regarded as outside the scope of VAT, being purely compensatory payments.

After various industry representations on the Brief, HMRC confirmed that it was reconsidering a number of its elements including the dilapidations question and whether the change of approach was to have retrospective effect.

The most recent draft replacement guidance indicates that HMRC’s policy is not to treat dilapidation payments as further consideration for the supply of a lease, and therefore dilapidations payments are not subject to VAT. 

We await the final guidance to know for certain but it will be a comfort for both landlords and tenants to have greater certainty on the issue. 

Key points:

  • pending formal clarification and updated guidance from HMRC on the treatment of dilapidations settlements, it has become common practice for landlords agreeing dilapidations settlement payments to express such payments as VAT exclusive, but to also expressly reserve the right to charge VAT in the event HMRC concluded dilapidations payments are within the scope of VAT
  • it is anticipated that the Brief will not have retrospective effect but until the replacement guidance is settled and published that cannot be definite