VAT treatment of dilapidation payments

Property is typically built on firm foundations. But the principles of taxing property are increasingly precariously constructed on shifting sand and the sand underpinning the VAT treatment of particular payments – noticeably dilapidations – has certainly been shifting over the past year or so.

In this article we assume that the property is used purely for commercial purposes and has been opted for VAT purposes. VAT is charged on the rent and premium reserved under the lease but the question is: does any dilapidations payment when the lease is terminated attract VAT or not?

For many tenants whether they pay VAT to the landlord on such amounts is purely a cashflow issue; this is the case where the tenant makes purely VATable supplies and used the former premises for making those VATable supplies. However for tenants who are not VAT registered or who are partially exempt...