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We understand that HMRC will shortly confirm that dilapidations, due under lease arrangements, will be treated as supplies for VAT purposes (previously seen as being outside the scope) from 1 February 2021. The change comes following some recent case law.

What this means is that if rent or a premium has been standard-rated (likely because there is an option to tax in place) any dilapidations will also be standard-rated for VAT purposes.

If rent is exempt from VAT then so will the dilapidation payment. This means that the business will have increased exempt income for partial exemption purposes.

Professional bodies continue to challenge this interpretation but it is understood that HMRC do intend to publish this guidance. It is therefore important that any ongoing or future lease exit negotiations consider this point.

Should you have any questions please contact Roger Wareham, a partner in our Bournemouth office, at roger.wareham@saffery.com

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