Dilapidations payments under commercial leases are currently outside the scope of VAT, but proposed new guidance issued by HMRC in Revenue & Customs Brief 12/20 suggested that position could be changing so that dilapidations could become subject to VAT where the landlord had opted to tax. That guidance is still under review following extensive representations made by professional bodies on the VAT treatment of dilapidations.

HMRC have agreed not to impose changes retrospectively, as originally proposed. Instead the changes will take place "from a future date". This was expected to be 1 February 2021, but we understand this has now been put back to 1 March 2021 at the earliest.

Landlords and tenants negotiating dilapidations payments should bear in mind that VAT may fall due on payments made after 1 March 2021 and ensure that commercial agreements reflect this :

  • If there is a change to the VAT treatment of dilapidations, this is likely to follow the VAT treatment of the lease itself. If the landlord has opted to tax, VAT will be due on the dilaps payment at 20%; if the landlord has not then the dilaps will be exempt from VAT.
  • Landlords who have not opted to tax and who undertake the repair works should still seek to recover any irrecoverable VAT from tenants as part of the dilapidations payments.
  • Unless HMRC introduce grandfathering for existing leases or settlement agreements, the date of payment will determine whether VAT will apply. Dilapidations payments made before 1 March are still outside the scope of VAT, but those paid afterwards risk having VAT applied.

For more information, please contact one of the contributors below.


Isobel d'Inverno

Director of Corporate Tax

Matt Farrell