Is VAT Payable on Dilapidations?
When VAT applies to cash settlements and contractor invoices.
VAT is not generally payable on dilapidations cash settlements between landlord and tenant, because they are treated as compensation rather than a supply of services. VAT is payable on the contractor's invoice when the tenant carries out the works directly.
When Is VAT Not Payable?
VAT is not payable when you negotiate a financial settlement with the landlord to cover the breach of lease covenants, because HMRC views this payment as damages.
Because no goods or services are being supplied to the tenant in exchange for this money, the settlement falls completely outside the scope of VAT. This rule was clarified by HMRC in 2020.
When Is VAT Payable?
VAT is payable when you instruct a contractor to carry out the physical reinstatement works on your behalf before the lease ends.
The contractor is providing a direct supply of construction services, which attracts standard VAT. However, if your business is VAT registered, you can typically recover this VAT through your normal returns.
Been served a schedule?
Get a fixed price for the works. We price line by line against your schedule.
How Does VAT Affect the Landlord's Claim?
If the landlord intends to do the works and cannot recover VAT (for example, they have not opted to tax the building), they will include the unrecoverable VAT cost in their claim against the tenant.
This effectively increases the dilapidations costs demanded on the schedule by 20%. If the landlord is VAT registered and can recover the tax, they cannot legally include VAT in their dilapidations claim against you.
Should I Take Tax Advice?
Yes, you should always consult your accountant or tax advisor regarding dilapidations settlements. Tax rules are subject to change, and the specific wording of a settlement agreement can alter its VAT treatment.
Frequently Asked Questions
Is a dilapidations settlement tax deductible?
Yes, dilapidations payments are generally considered a revenue expense for the tenant and can be deducted from taxable profits. You should always confirm this with your accountant.
What if the landlord has opted to tax the property?
Even if the landlord has opted to tax the property, HMRC rules currently state that dilapidations settlements remain outside the scope of VAT as they are compensatory.
Do surveyors charge VAT on their fees?
Yes, surveyor and legal fees associated with dilapidations claims are subject to standard VAT.
Been served a schedule?
Get a fixed price for the works. We price line by line against your schedule.
The simplest way to handle dilapidations is to procure the works directly as a standard business expense. We carry out fixed-price dilapidations works, invoicing you normally so you can process the works through your standard accounting.