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Dilapidations : in or out of scope of VAT?

One year ago in our February 2021 newsletter, we reported on HMRC’s briefing paper numbered 12 of 2020 which indicated that VAT was payable upon damages paid for dilapidations. The decision, which originally stated that payments would be retrospective, led to considerable discontent and debate in the property industry. Later HMRC, having taken counsel’s advice, stated that payments would not be retrospective but would be payable from some future date. Originally that date would be 1st February 2021 although HMRC stated that would be confirmed in due course. Confirmation was awaited although many firms practising in the dilapidations arena began to ask tenants to pay for dilapidations plus VAT with the VAT element being paid into a separate account to be repaid if HMRC were to change the payment date.

However, when HMRC issued its updated paper on VAT ‘Supply and Consideration’ on 7th February, 2022, practitioners were surprised to find that HMRC had had second thoughts. In its paper VATSC05910, the Revenue stated “Whether a payment is for a VAT supply depends on whether anything is being done in return for a consideration. Where a party agrees to do something in return for a fee there is a supply. How that fee is described does not affect whether there is a supply for VAT. What matters is whether something is done and if there is a direct link between what is done and the payment received, and reciprocity between the supplier and the customer”.

It continued saying that a “potentially difficult area are dilapidation payments which occur in the land and property sector. These vary in the way they are provided for but broadly they exist to ensure landlords are not out of pocket if buildings are not returned in the agreed condition at the end of the lease. Our policy continues to be that these are normally outside the scope of VAT”. It referred to its guidance paper entitled ‘Land and Property (VAT Notice 742)’ which confirmed that “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 to VAT.”

So, to confirm, dilapidation payments are outside the scope of VAT.

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