Back in 2020 HMRC issued a Revenue & Customs Brief which set out HMRC’s view that, as a result of certain European Court cases certain payments which had previously been regarded as being outside the scope of VAT on the basis that they were payments of compensation or liquidated damages were, in fact, consideration for the original supply of goods or services to which they related.

This raised the possibility that HMRC would take the view that dilapidation payments were subject to VAT at the standard rate, where previously they were deemed to be outside the scope of VAT.

The original Brief had stated that HMRC would be looking at such payments retrospectively which would have resulted in organisations suffering VAT assessments, even though the payments had been treated in line with HMRC’s previous policy. However, following several representations to HMRC, they withdrew this Brief and stated that the new policy would take effect from 1 February 2021 rather than being backdated. This was obviously positive in that it would prevent organisations suffering large assessments for historic payments, but it meant that tenants who were unable to recover all of their VAT were looking at an irrecoverable VAT charge on any dilapidation payments made from 1 February 2021 onwards.

To date, there has been no further Brief issued and we now understand that HMRC have backtracked further on this and that draft guidance has been prepared stating that dilapidation payments will not be deemed to be further consideration for a supply of a lease, meaning that they will continue to be outside the scope of VAT.

It is hoped that this is the case, and that this guidance will be issued soon to bring an end to the uncertainty HMRC’s pronouncements have caused.

We will of course update you as soon as further guidance is issued but in the meantime, please do not hesitate to contact Stephen Patey in our VAT department should you wish to discuss further.