In this week's round up we consider the latest guidance on the application of VAT on dilapidations payments and a case in which the Court considered whether holiday homes come within the enfranchisement rules. As always, we conclude with some positive news together with insights from around the firm.
New HMRC Guidance on VAT on early termination fees and dilapidations payments
HMRC has issued new guidance on the VAT treatment of early termination fees and compensation payments, which provides some welcome clarification, particularly over the question of whether dilapidations payments ought to carry VAT.
HMRC's view on the new guidance as regards early termination payments and dilapidations can be broadly summarised as follows:
- Early termination payments (e.g. break fees) – these payments will generally be seen as following the same VAT treatment as the underlying supply, unless "clearly punitive and designed to prevent breach".
- Dilapidations – these payments are outside the scope of VAT on the basis that they represent compensation paid to the landlord by the tenant. If the amount is fixed from the start of the lease, and therefore cannot be considered compensation, the amount is likely to be treated as rent and subject to VAT.
For further information and advice relating to these issues, please contact our Tax experts Michael Surry or Andrew Sneddon.
Mortimer and others v Eco Chic Limited
In this case the Court determined a novel issue as to whether holiday homes fell within the definition of a "house" for the purposes of enfranchisement under the Leasehold Reform Act 1967.
The dispute arose when the Claimants sought to acquire the freehold of four respective properties which were held on long leases. The Claimants served notices of claim on the Defendant freeholder to acquire the freeholds in accordance with section 5 of the Leasehold Reform Act 1967 (the 1967 Act). The Defendant refused to accept the validity of the notices on the grounds that the holiday homes were not "houses" within the meaning of the 1967 Act. If correct, this would mean that the 1967 Act does not apply and therefore that there would be no statutory right for the tenants of these properties to acquire the freeholds.
The Court had to consider two questions arising from section 2(1) of the 1967 Act: first, is the building one designed or adapted for living in and secondly, is it a house reasonably so called?
The first question fell to be decided by reference to the physical characteristics of the property. Although these were holiday residences, the Court concluded that the buildings had indeed been designed for living in. In relation to the second question, the Court considered that the use of the property was a decisive factor in determining whether the property was a house reasonably so called. The terms of the lease (limiting use as a holiday residence) and planning conditions limiting occupation of the property during certain annual periods were considered but the Court concluded that the holiday homes were correctly to be classed as houses reasonably so called. This was primarily because the properties were used exclusively for residential purposes and the Claimants regarded the properties as one of their homes, even if not their principal residence.
Although judgment was found in favour of the Claimants, it is important to note that significant weight was placed on the use and design of the house, meaning not all holiday homes would qualify for the statutory right to enfranchise.
For further information and advice on enfranchisement issues, please contact our enfranchisement expert, William Bethune.
Insights from around the firm
- Mandatory ethnicity pay gap reporting recommended
- Acas publishes new bereavement guidance
- Charlotte Brasher produced an article for FarmingUK on a recent telecoms case
Positive news