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Construction, Land and Property

Compensation and dilapidations – VAT update


In September 2020 HMRC issued the now infamous brief 12/20 which “reset” HMRC’s views as to the VAT treatment of payments previously seen as compensation and outside the scope of the tax now being taxable.

The infamy was in HMRC’s decision that this was to be implemented retrospectively (even though all HMRC’s advice was that such payments were outside the scope at the time).

This created a huge backlash from the profession and HMRC withdrew the guidance to “review”. Now over a year later HMRC have issued new guidance. This confirms that most supplies previously treated as compensation (e.g. payments for early termination) will become subject to VAT but with effect from 1 April 2022, so no retrospection. Whilst HMRC says that dilapidations are still considered to be outside the scope, care must be taken if dilapidations are included in the lease, or there’s a calculation or other reference to the issue.

This article is from the latest issue of our Construction, Land and Property Bulletin - Spring 2022. To receive future copies of any of our newsletters directly to your inbox please visit our preference centre and register your interest.

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