As many are aware, the HMRC has revised their approach surrounding the treatment of VAT on payments relating to damages and compensation i.e. dilapidations. The new approach we understood will come into effect from 1st March 2021, after the HMRC have advised a push back from the initial date of 1st February 2021.
Following recent rulings in the European Courts of Justice, compensation and damages payments for exiting a contract early have been considered as a payment which is envisaged under the contract, hence should be consider for VAT. Previously, HMRC classified such payments as outside the scope of VAT because they were not paid under the contract.
Whilst there is still uncertainty regarding the impacts to dilapidations settlements, it is considered that such payments of damages, will fall within the scope of VAT. Landlords and Tenants therefore need to plan for this and consider the implications of VAT at an early stage, including making allowances from a cash flow perspective.
We appreciate dilapidations can be a mind-field, never mind the complexities surrounding VAT and here at Bradley Mason, we are well placed to advise how best to exit your property. Please do not hesitate to contact the team for further assistance.