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Further Financial Blow For Commercial Tenants

11th February 2021

Further Financial Blow For Commercial Tenants

Landlords and tenants are being advised to seek professional advice after HMRC announced that dilapidations payments may now be subject to VAT.

Peter Humpherson, a member of the Higgs & Sons’ Property Litigation team, warned that the changes could be “devastating” for tenants.

In September 2020, HMRC published a Revenue & Customs Brief (12/2020) following a series of decisions in courtrooms across Europe. The brief set out that certain payments that had previously been considered outside the scope of VAT - for example, payments relating to compensation or damages - were, in fact, a consideration for the original supply of the relevant goods or services.

Peter said: “It appears on the face of it that payments made to landlords in relation to dilapidations, for example, would fall within the new VAT regime. Where a lease obliges the tenant to return the premises to the landlord in the same or a similar state as at the outset of the lease, and the tenant defaults, it seems to be HMRC’s view that such payments made to the landlord accordingly would amount to further consideration for entering into the original lease. Those payments would either be taxable or exempt, depending on whether the landlord opted to tax the premises at the outset.

“The effect on tenants could be devastating. For instance, a tenant who might not be able to recover all of their VAT could be on the end of a non-recoverable VAT charge on a dilapidations payment made to their landlord. The changes represent a significant shift, given that dilapidations payments were previously considered to be outside the scope of VAT.”

HMRC initially suggested that the changes would be applied retrospectively, however, the latest HMRC announcement confirms otherwise, and states that that the updated VAT regime will be applied “from a future date.”

HMRC is being pressed for confirmation as to whether certain payments, in particular those relating to dilapidations, will fall within the new regime. It is hoped that the renewed guidance provides that much-needed clarity.

In the meantime, pending the release of further detail, landlords and tenants would be well-advised to seek specialist property litigation and tax advice on their position.

Contact Peter Humpherson on Peter.Humpherson@higgsandsons.co.uk or 01384 327126.

 

 

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