Tenants take note: dilapidations damages to be subject to VAT

19 Jan 2021

Those who regularly let commercial premises will be aware that landlords are usually able to claim damages for dilapidations arising from breaches of a tenant’s covenants relating to the physical state of the building at the end of the lease. 
 
Because the payment of damages represents compensation for the tenant’s failure to comply with their lease obligations, such payments have historically been outside the scope of VAT. However that is about to change. 
 
HMRC has confirmed that they intend to treat dilapidations payments as being subject to VAT (if the landlord has opted to tax) from 1 February 2021.  HMRC’s view appears to be that since dilapidations payments are provided for in the lease, they represent an additional consideration payable by the tenant under the lease and should therefore be subject to VAT.
 
With less than two weeks to go, it is therefore imperative that you make it clear whether any dilapidations damages settlement you’re currently negotiating is inclusive of VAT.
 
The good news is that HMRC do not intend to make the new rules retrospective, so any old dilapidations settlement agreements do not need to be revisited.
 
HMRC has invited comments on these changes, but with such a short timeframe before they come into effect, it is likely that the new rules will be in force as drafted from 1 February 2021 regardless.  Whether they might be amended subsequently remains unclear.
 
This change could be unwelcome news for those tenants where they cannot recover VAT themselves (such as those who are VAT exempt). 
 
In all cases, it would be wise for a landlord in any dilapidations settlement agreement to state whether the sums due are inclusive or exclusive of VAT, and include an express provision requiring the tenant to pay VAT on any damages in the event that HMRC find that such a payment is subject to VAT.  If it is clear that VAT has already been accounted for in the settlement sum, the settlement sum should be expressed as inclusive of VAT and the tenant should seek to ensure that the agreement is in full and final settlement of the claim, including any applicable VAT.
 
If you are affected by this change, please do not hesitate to get in touch with a member of the team.

Further reading

Reversal of changes to High Net Worth Individual and Self-certified Sophisticated Investor criteria implemented

Blog, Legal Updates
18/03/2024
As discussed in our recent update, the government announced in the Budget that the eligibility criteria for the exemptions, which allow shares and other financial instruments to be marketed to High Net Worth Individuals and Self-certified Sophisticated Investors without the regulatory protections
Read more Read

FCA to investigate personal guarantees in small business lending following a super complaint

Blog
12/03/2024
The FSB has raised concerns that the demand for personal guarantees by lenders has a detrimental impact on small businesses accessing borrowing to grow
Read more Read

ECCTA: Fundamental changes for companies and considerations for lenders: Practical points to note

Blog
08/03/2024
Tyne Harman outlines some of the key considerations for lenders and borrowers alike to be aware of.
Read more Read

Budget News – reversal of changes to High Net Worth Individual and Self-certified Sophisticated Investor criteria

Blog, News & PR
06/03/2024
In today’s Budget statement, the government indicated that it will legislate to reinstate the previous eligibility criteria to qualify as a high net worth or sophisticated investor, and will also carry out further work to review the scope of the exemptions.
Read more Read
  • Brighton - Jubilee St

    1 Jubilee Street

    Brighton

    East Sussex

    BN1 1GE

  • Brighton - Old Steine

    47 Old Steine

    Brighton

    East Sussex

    BN1 1NW

  • Gatwick

    Griffin House

    135 High Street

    Crawley

    West Sussex

    RH10 1DQ

  • Guildford

    Wonersh House

    The Guildway

    Old Portsmouth Road

    Guildford

    Surrey

    GU3 1LR

  • Hassocks

    32 Keymer Road

    Hassocks

    West Sussex

    BN6 8AL

  • Horsham

    3rd Floor

    Afon Building

    Worthing Road

    Horsham

    West Sussex

    RH12 1TL

  • London

    6 New Street Square

    New Fetter Lane

    London

    EC4A 3BF

  • Make an enquiry

    Make an enquiry

    Message

    Or head to our Contact us page