As You Found It: HMRC’s Clarification on VAT and Dilapidations Payments

HMRC has recently published revised Brief 2 (2022) which has clarified the position on VAT and dilapidations payments. This replaces the previous Brief 12 (2020). The updated brief came into effect on 1 April 2022.

What Was the Issue?

Prior to the 2020 Brief, HMRC did not usually treat early termination payments and compensations as liable for VAT, as these types of payments were viewed as compensatory payments, rather than for a supply of goods and services.

Following two decisions from the Court of Justice of the European Union (“CJEU”) in MEO (C-295/17) and Vodafone Portugal (C-43/19), the HMRC issued the 2020 Brief. This stated that most early termination and compensation payments would be viewed as further considerations for the contracted supply of goods and services, and would potentially be liable to VAT.

HMRC’s rationale was that where a payment is for a taxable service under a contract, VAT should be charged irrespective of whether the supply of services continued to take place after the contract has been terminated. It endorsed the CJEU’s view that:

• where a customer is required to pay an amount equivalent to the remaining fees of their mobile phone contracts as early termination compensation the supplier is in fact receiving further consideration for the original supply;
• whether these payments are labelled ‘compensation’ or ‘termination fee’ was irrelevant.

How Did This Relate to Commercial Property?

Although much of the content of this 2022 Brief remains the same as the 2020 Brief, it has provided some clarity  surrounding VAT and dilapidations payments:

• HMRC has now confirmed that it will continue to treat dilapidation payments as outside the scope of VAT. VAT Notice 742 Land and Property will continue to apply to dilapidation payments.
• They have allowed themselves some leeway and said whilst their view is that dilapidation payments are generally outside the scope of VAT, it might depart from that view if it finds evidence in individual cases of value shifting from rent to dilapidation payments to avoid accounting for VAT.
• This allows HMRC to look into specific cases if they consider values that have been falsely attributed to reducing the amount of rent subject to VAT.

Ultimately, things stand as they were. The approach that has been previously taken, has been clarified and confirmed.

If you would like to speak to someone about the above changes or any other matters on commercial property, please don’t hesitate to contact a member of our team.