On Monday HMRC released Revenue and Customs Brief 2/22 (RCB 2/22) - the latest and perhaps last word in the long running saga around the VAT treatment of early termination and compensation payments.
If you have read our earlier blogs on the topic (here and here) you will know that this has been a point of concern since HMRC published RCB 12/20 in September 2020. At one point, HMRC appeared to view dilaps as part of the consideration for the lease – and therefore subject to VAT if VAT was due on rents. RCB 2/22 replaces RCB 12/20 which has now been withdrawn.
RCB 2/22 finally establishes that HMRC's general policy is to treat dilapidations as outside the scope of VAT.
Perhaps understandably – given that at one stage they appeared to take the view that dilapidations should be within the scope of VAT – HMRC have left themselves some wriggle room. Their revised guidance states that:
Our policy having weighed these factors is not to treat dilapidation payments as further consideration for the supply of a lease. We might depart from that view if in individual cases we found evidence of value shifting from rent to dilapidation payment to avoid accounting for VAT.
In other words, if HMRC consider that the value of dilapidations has been manipulated to reduce the amount of rent subject to VAT, they may enquire into specific cases. It remains to be seen how and whether HMRC might pursue such enquiries.
We cover the additional changes arising from RCB 2/22 in more detail elsewhere.