The impact of VAT charges on dilapidations matters

Stephen Seeney, Senior Surveyor at Rund Partnership discusses the potential new rulings around VAT charges on dilapidations matters and future considerations for landlords and tenants.

HMRC recently released the Revenue and Customs Brief 12 (2020) which suggests that dilapidations payments could be subject to VAT charges in the future. With dilapidations settlement payments often amounting to hundreds of thousands of pounds, this change would create substantial additional charges, impacting both landlords and tenants.

Context around the potential VAT ruling on dilapidations matters

Dilapidations have traditionally been treated as compensation for damages and therefore did not attract VAT.

However, the Revenue and Customers Brief 12 (2020) stated a new outlook: that compensation or ‘early termination payments' should be liable for VAT charges.

The change has come about following various judgements by the Courts of Justice of the European Union (CJEU) on cases regarding mobile phone contracts and charging VAT for early termination charges.

The CJEU ruled that those signed to a contract should be charged VAT, as these payments are part of the supply of services under a contract. Therefore, the same ruling should apply to other compensation or ‘early termination' payments.

This also follows guidance within the HMRC's VAT Supply and Consideration Manual, where the department questioned why some forms of income received by suppliers from customers are within the scope of VAT, and others are not.

Should this change come into effect, it could mean that many dilapidations settlements will attract VAT.

New considerations for landlords and tenants on dilapidations matters

Landlords will need to ensure that any settlement agreements clearly state whether payments are inclusive or exclusive of VAT.

This will be an important consideration to avoid unexpected deductions impacting landlords in the future.

In addition, tenants will need to be aware of potential VAT charges when considering dilapidations claims made against them.

The prospect of these charges may encourage them to undertake repairs themselves, rather than rely on landlords to do so, to avoid further costs.

The potential addition of VAT charges to dilapidations settlement payments reiterates the crucial need for expert consultancy services to be instructed early in the dilapidations process. Commissioning an expert will help ensure all potential costs are clearly understood from the beginning of the process, leaving no room for the ‘unexpected'.

At Rund, our expert surveyors are at hand to provide a tailored, complete service to both landlords and tenants throughout the lifecycle of a lease. We offer bespoke advice to ensure each party has a full understanding of property condition requirements.