Housebuilder Tip of the Month: Compensation and VAT

Published 29 marzo 2022

 From 1 April 2022, HMRC will treat most early termination and compensation payments as within the scope of VAT where they arise from contracts subject to VAT. However, HMRC has confirmed that it will continue to exclude genuine dilapidation payments from VAT.

Where a payment is not consideration for a supply of services HMRC will not consider those payments as subject to VAT. However, influential European cases on VAT have encouraged HMRC to consider that early termination and compensation payments are essentially further consideration for the supply of services.

HMRC is not applying the same approach to dilapidation payments as it views these payments as damages for a tenant's breach of their repairing covenant and not a form of consideration. Nevertheless, contracts should be drafted to explicitly establish that a dilapidation payment is a damages mechanism and not a disguised form of consideration.

The prudent reader should continue to monitor HMRC's approach to dilapidation payments as its attitude may shift following the recent case of Apcoa Parking which decided that penalties were effectively consideration for a supply of services.

For further information please contact John Dunlop in our tax team.