HMRC Update 2022
During 2021/2 HMRC reviewed the treatment of VAT in Dilapidations and having listened to industry have now confirmed there is no change by issuing a revised policy which took effect on 1st April 2022.
In summary, HMRC policy continues to be that dilapidations payments are normally outside the scope of VAT, treating these payments as further consideration for the supply of a lease. There are some exceptions; for example HMRC may depart from this view if they find evidence of value shifting from rent to a dilapidation payment to avoid accounting for VAT. Our advice is therefore to state clearly that the payment relates only to dilapidations in a signed settlement agreement.
VAT in Dilapidations
VAT in respect of dilapidations is a complex subject with its own set of rules, regulations and case law. Opinions are usually divided and much will depend on the circumstances.
Where a tenant is making a payment to a landlord in full and final settlement of its dilapidation liabilities, under Customs and Excise rules, the payment is not a ‘taxable supply’ for the purposes of VAT. This is because Customs and Excise deem the payment to be one of damages and not a supply of something. VAT may be payable if the landlord passes the payment on to an incoming VAT registered tenant.
Complying with the European Community Law, the Finance Act 1989 introduced major changes which included giving UK payers of VAT the option to pay VAT on supplies relating to an interest in commercial land. Where a person or company is registered for VAT there is a special statutory exemption to the charging of VAT on such supplies. The tax payer can waive this exemption if they desire. To do this they must notify HM Customs and Excise. For clarity, if a landlord has elected to waive exemption on a building, he must charge VAT on such items as rent received (ie supplies that the tenant is receiving). In this instance, it will not be appropriate to include VAT as part of a dilapidations claim. If the VAT exemption has not been waived then VAT need not be charged by the landlord on supplies, and VAT may form part of a dilapidations claim.
So the first issue to establish is whether the landlord is registered for VAT. Is the landlord required by VAT law to charge VAT on its normal business transactions such as rent receipts. If so, has it elected to waive VAT exemption on the specific building that is subject to the dilapidations claim?
Once this has been established, a simplified VAT analysis might follow the steps shown in the diagram.
The Protocol requires that the claim establishes what the landlord’s intentions are, and states the landlord’s and/or the demised property’s VAT status. A basic understanding of the VAT issues is therefore necessary, if the requirements under the Protocol for an accurate initial claim are prepared.
