James McAllister, Director of The Dilapidations Consultancy, sets the record straight on VAT in dilapidation claims.

Introduction

Let’s start with a fact: Dilapidations is outside the scope of VAT as far as HM Revenue & Customs are concerned. So there we have it, VAT need not feature in dilapidation claims and settlement agreements. If only it were that simple.

Whilst VAT technically has no place in dilapidations, for reasons that shall become clear, there are instances where an allowance for VAT can legitimately be included, despite HMR&C’s seemingly clear and robust view on the matter.

Damages v Supply of Services

The position of HMR&C on VAT in dilapidation claims is set out in section 10.10 of Notice 742 (Land and Property). This is because it is a payment in settlement of damages and not ‘consideration’ in return for a ‘supply’ for VAT purposes.

This stands to reason: a tenant paying the Landlord an agreed sum for having failed to return the property in the condition they had covenanted under contract, is not, therefore, paying the Landlord in return for ‘supply’ of goods and services. This is irrespective of the ‘elected’ VAT status of either the Landlord or the Building.

So when does VAT apply to dilapidations claims? Whilst VAT never actually applies to dilapidations, in reality there are situations where an allowance for VAT can be included on the settlement figure, known as ‘compensation in lieu of VAT’.

This principle can be applied where the Landlord is genuinely at risk of suffering an otherwise irrecoverable loss to the value of VAT on any work he undertakes through the tenant’s default, but will, of course, depend on the elected status of the building.

VAT Status – The Building

Looking firstly at the VAT status of the subject building, all Landlords have the option to keep the building exempt (aka ‘unelected’) or to waive the natural exemption and thus ‘elect’ the building for VAT; this is also known as ‘opting to tax’.

The tenant will know the VAT status of the building from the outset since they will either pay VAT on their rent or they will not. This is the simplest way Surveyors negotiating dilapidation settlements can adduce the VAT status of the building.

Building: Exempt

Where the Landlord has retained the exemption, meaning no VAT was charged on the rent, and assuming the tenant failed to deal with any dilapidation works prior to lease expiry, then the Landlord may wish to undertake the claimed works himself.

On the basis the building is exempt from VAT (no VAT charged on rental income) the Landlord will not be required to file a quarterly VAT return in which ordinarily any VAT incurred on the payment of legitimate business related expenses (known as input tax) can be offset against VAT owed to HMR&C where charged on the supply of goods and services, i.e. rent (known as output tax).

Accordingly, the exempt status of the building will mean that any VAT the Landlord incurs on materials and labour in undertaking the works is effectively lost as it cannot be offset against output tax.

In dilapidations parlance this is deemed to be an ‘irrecoverable loss’. This loss then needs to be addressed or else the Landlord will have incurred extra expense resulting from the tenant’s failure to observe their repairing obligations. The value of this loss (currently 17.5%) can then be recovered from the tenant within the dilapidations settlement as ‘compensation in lieu of VAT’.

Building: Exemption Waived

Conversely, if the Landlord has ‘waived the exemption’, and in so doing charges VAT on rent, then he will be in a position to offset VAT on any subsequent works expenditure (input tax) against VAT owed to HMR&C on any income derived from the property (output tax).

Therefore, no loss is suffered for any VAT outlay on the works the tenant ought to have undertaken, and as such, ‘compensation in lieu of VAT’ cannot be added to the dilapidations claim as an irrecoverable loss.

VAT Status – The Landlord

Contrary to the belief of many Surveyors, the VAT status of the Landlord is irrelevant as far as the treatment of VAT on dilapidation claims is concerned. The Landlord may be personally unregistered for VAT purposes, but might hold the property under a limited company for that property alone, and in so doing, opt to register the building for VAT.

Each building is therefore unique and sweeping generalisations as to the applicability of compensation in lieu of VAT to dilapidation settlements based on the registered status of the Landlord should not therefore be made.

There is one exception, however, and that is financial institutions. Some organisations fulfil the role as Landlord through either freehold owned property stock or as head tenant where the regulated status of their core financial business means they are unable to claw back VAT on any works expenditure whatever their status, or indeed the elected status of the building.

In those circumstances, the inability to offset input tax against output tax, even where exemption has been waived, will mean VAT does present a genuine loss which is likely to be included in any dilapidations settlement.

Realistic Prospect of Implementing Works?

Whether the works to remedy the claimed breaches have been done, might be done or are unlikely to ever be done are all central to the issue. The difference between whether the works are likely or unlikely to be done will have a significant impact on the eligibility of the Landlord to successfully claim compensation in lieu of VAT on the settlement, provided of course the aforementioned criteria is also met.

It stands to reason that if the Landlord has absolutely no intention of undertaking any such works post-lease expiry, then there will be no incurred ‘irrecoverable loss’ in the form of VAT, so the claim should not include for it: Elite Investments v TI Bainbridge Silencers Ltd (No.2) [1987].

It is worth noting, that this does not preclude the Landlord from successfully claiming the remainder of the dilapidations damages, assuming loss has been proven elsewhere. It is anticipated that in the absence of any forthcoming information from the Landlord, the burden of proof will fall upon the tenant to demonstrate that the likelihood of the Landlord getting his hands dirty is fanciful, until the passage of time speaks for itself.

If, on the other hand, the Landlord is able to demonstrate a genuine intention to undertake the works, or better still, having already carried them out, then the additional claim for compensation in lieu of VAT on top of damages for the works is likely to be enforceable as a legitimate basis for compensating loss: Drummond v S & U Stores Ltd [1981] and Sun Life Assurance Plc v Racal Tracs Ltd [2000].

Accounting For VAT on Dilapidations

The above sets out the basis upon which VAT can be included in dilapidations settlements, which is fine in principle, but a further hurdle arises when it comes to the practicalities of raising the invoice. Unless the settlement has been agreed on a handshake with a cheque to follow, most dilapidation settlements, certainly among large commercial organisations, will need to be processed through the accounts, usually culminating in

the raising of an invoice. The problem then arises when the VAT column awaits completion, when, of course, the claim was settled on the basis of a lump sum in ‘full and final settlement’. Obviously, if the Landlord has legitimately claimed VAT on the settlement then there will be no VAT entry on the invoice since the Building will not be an ‘elected’ entity.

As stated above, the ability to add VAT to the settlement arises out of the Landlord having no other means of offsetting or recouping this loss. Equally, if the Landlord is expecting to apportion part of the settlement as VAT on the invoice (i.e. ‘elected’ for VAT) then the chances are he shouldn’t be claiming it in the first place through the ability to offset input tax against output tax.

The real complication arises where the invoice is being raised either by a management company or agent on behalf of the Landlord, or where the Landlord’s own holding company is VAT registered and is processing the accounts of an interest that isn’t registered, suddenly the VAT figure is difficult to position. Where the Landlord and their business interest is unregistered, this is quite simply a single lump sum figure and VAT need not be mentioned.

Where the Landlord is registered and the building is unregistered then a lump sum figure without a breakdown for VAT may not be possible, so the total claim may need to be ‘netted back’ accordingly. This adds a further problem in that the accounts will then show VAT on income (output tax) thereby creating an obligation to pay HMR&C when the whole purpose of its recovery was to compensate the Landlord (as far as the unelected building is concerned) for the inability to recover VAT on works expenditure by any other means.

Therefore, careful consideration needs to be given to the invoice procedure, and where the process is likely to be complicated, as above, it is advisable to have an alternative invoice arrangement or statement for the purpose of the dilapidations settlement, which after all, is settlement of damages rather than supply of goods and services.

Listed Buildings

VAT in listed buildings adds a further potential complication in that repairs are standard rated, but improvements do not attract VAT, provided they follow consent and are undertaken by a VAT registered contractor.

However, improvements are unlikely to feature in a dilapidations claim, unless as a natural consequence of repair (Minja Properties Ltd v Cussins Property Group Plc [1998]), or where necessary to achieve a ‘once and for all’ cure to an ongoing disrepair (Elmcroft Developments Ltd v Tankersley-Sawyer [1984]); thus repairs will be treated for VAT in the normal way, and subject to the conditions set out above.

Conclusion

VAT should not therefore be considered as a foregone conclusion on each and every dilapidations settlement. For compensation in lieu of VAT to be properly administered and legitimately claimed, due consideration should be given to the elected status of the building, whether the works are likely to be done, and whether the status of the Landlord means the cost of VAT on the implementation of works would amount to a loss irrecoverable by any other means.

It is important to bear in mind the principle in all dilapidations claims settled by way of damages: the Landlord cannot claim what he has not lost.

James McAllister is a Director of The Dilapidations Consultancy Limited.

The Dilapidations Consultancy Ltd
m: 07866 092885 t: 0844 3510885
www.dilapidationsconsultancy.com

Landowners with Orange mobile phone masts on their property should be aware of the merger between T-Mobile and Orange which might bring with it problems for them, says Nigel Foster at rural specialist George F. White.

As a result of the merger of T-Mobile with Orange earlier this summer, legal issues and possible mast redundancies could leave landowners throughout the UK with unexpected contractual problems unless they take action now.

Nigel, who is based in the Bedale office of George F White and has extensive experience of telecommunication site leases explains: “the newly merged company – known as “Everything Everywhere Limited” – will probably be looking to transfer contracts made by Orange to the new company.

They may also be looking to abandon the masts that they no longer need. So, any landowner that has let a telecoms site to Orange may wish to dust down the lease and look at the smallprint”.

The reason that problems are likely to fall on landlords who have let sites to Orange is due to the way that the companies have been merged and re-named. T-Mobile masts are less likely to present a problem as it has simply changed its name to Everything Everywhere, taking existing leases with it.

Orange (which still exists as a registered company) on the other hand may need to transfer the leases that it holds to the new company. If so, this will need to be documented and may require careful negotiation between the new company and the landowner.

Another issue is the possible redundancy of up to 9,000 of Orange’s 13,000 masts. Terms are likely to differ from one lease to another with regard to what happens when a mast is surplus to requirements – it will be worth looking at the compensation provisions (if any) that apply, together with the requirements for notices to be served and what is to happen to the redundant apparatus.

As Nigel points out, some of the older leases may not have spelt this out: “if drawn up ten years ago or more, it may be that little thought at that time was given to the scenario of a mast becoming surplus to requirements.

On the basis that being forewarned is to be forearmed, it would be as well to study the lease to see if and how it provides for an early termination of the lease in the event that the apparatus becomes redundant.

Even if the contract provides for the disposal of any equipment and restoration of the site, the landowner may have other uses in mind and the new company may prefer simply to walk away and save themselves the cost of restoration”.

“Now is the time to check your lease. I would suggest that landowners are proactive and it may be appropriate to approach Everything Everywhere to make sure that the best terms are negotiated with the new company. If people are unclear on any of these issues, we at George F White can also advise as to how best to proceed”.

Everything Everywhere Limited aims to give better mobile coverage to its customers – it will now cover 96% of the UK and make considerable savings due to the merger.

George F White has offices in Alnwick and Tyne Valley in Northumberland, Wolsingham and Barnard Castle in County Durham, Bedale in North Yorkshire, Shiptonthorpe near York and Park Lane in London. www.georgefwhite.co.uk. Nigel Forster is based in the BEDALE office of George F. White and can be contacted on 01677 425 301.

Rent arrears cause nearly half of landlord possessions

Samuel Dale, MortgageStrategy.co.uk – 16 August 2010

Nearly half of all landlord possessions are caused by tenants not paying rent, says the National Landlords’ Association.

It follows recent NLA data showing a fifth of private-residential landlords had tenants in rent arrears during Q2 2010.

Whilst one-third of landlords had never sought to end a tenancy, the survey found 23.3% did so because of anti-social behaviour by tenants.

Landlords reported in 57% of possession cases the tenants took less than three months to move out, while 81% of cases were resolved within five months.

David Salusbury, chairman of the NLA, says: “Gaining possession can be very costly for landlords, especially when it is related to rental arrears. Many landlords have mortgages to pay on top of the expense of gaining possession.

“One-third of landlords have reported paying between £250 and £1,000 to have tenants removed. This amount is often compounded by late rent payments.”

NLA Rent Arrears is a cost-effective service to help resolve rent arrears’ issues or undertake possession proceedings. Specialists will act as a mediator between the landlord and tenant in order to collect outstanding rent or seek possession through the courts.

Alternatively, landlords can take out NLA Rent Guarantee which covers up to £2,500 per month for unpaid rental income if the tenant falls into rent arrears.

“Fair Wear and Tear” is the traditional technical term used to describe the amount of deterioration (delapidations) which must be discounted when assessing damages claimed from a tenant at the end of their tenancy.

This aspect has become more important for landlords now that all depeosits for ASTs must by law be protected. Any claim for manages against a tenant’s deposit will invloved the assessment of fair wear and tear.

In this article supplied to LandlordZONE by Nick Lyons, MD of No Letting Go – www.nolettinggo.co.uk – a national provider of landlord and inventory services, protecting residentially and commercially owned properties.

As well as providing top quality inventories by highly trained, APIP (The Association of Professional Inventory Providers) qualified inventory clerks, managed through regional offices, No Letting Go believe in working in partnership with landlords and letting agents to provide inventory check-in and check-out reports.

In addition they do property visits, key holding services, property viewing services, block and estate visits and post work inspections.

Nick Says:

There is a very fine line between what can be happily termed ‘fair wear and tear’ and what constitutes ‘damage’. Take a look at the Dispute Service web site which details various case studies relating to disputes between landlords and tenants. It evident that there is plenty of scope for landlords and tenants to be treated unfairly if good practice is not followed.

A meticulous and consistent approach to check-ins / check-outs / inventories and interim visits should be an absolute priority for landlord and letting agents. Correctly undertaken, these will deliver the vital foundation of a successful and uncontested tenancy by providing all the necessary supporting documentation to avoid any dispute between the landlord and tenant.

An independent inventory management company like No Letting Go is far better equipped to provide an unbiased and objective assessment of a property and this applies throughout the period of the tenancy. Tenants are likely to respond better to someone independent from the landlord and whose judgment is not clouded by any existing or historic relationship.

Extensive experience of the business, which includes an in-depth understanding of the potential pitfalls associated with the ‘fair wear and tear’ debate, will also pay dividends – protecting both the landlord’s property and reducing the risk of unscrupulous claims affecting the safe return of the tenant’s deposit.

Whoever is responsible for determining fair wear and tear, it is essential that the landlord is appreciative of the need to make allowances for depreciation – whilst accepting that he / she cannot use the tenancy as a means of ‘betterment’ i.e., seeking out replacement of damaged / missing items with new ones (unless the items were brand new at the start of the tenancy).

No Letting Go assesses fair wear and tear and depreciation values based on APIP (The Association of Professional Inventory Providers) and ARLA (The Association of Residential Lettings Agents) guidelines as well as those laid down by the TDS (Tenancy Deposit Scheme – www.thedisputeservice.co.uk). Decisions are made taking into consideration a number of key criteria including:

The tenancy agreement

The type of tenant e.g., family, professional couple, single occupancy, students, will have a huge bearing on the anticipated overall wear and tear on items in a property. For example, a family of four is likely to use a washing machine more often than a professional couple and therefore this needs to be considered.

Likewise a medium quality carpet with a professional couple living at a property would last for typically 5 years, whereas a family occupancy would reduce the lifespan to perhaps 3 years.

The length of occupancy will also need to be taken into consideration – the impact of a two-year occupancy may vary enormously to the toll of a 6-month occupancy. Equally, when a tenant has had a five-year stay in the same property, it becomes very difficult to prove unacceptable wear and tear.

Consent for smokers or pets in the property will also have implications on the expected condition of the property at the end of the tenure.

The tenancy agreement may contain specific clauses relating to the required care and attention of particular items / amenities which the tenant has access to during the term of his / her stay. Care of the external living area i.e. the garden represents a classic example of this and is so often the cause of heated debate between landlord and tenant.

In the majority of cases the garden will be treated as an ‘outdoor room’ and as such, should be returned to the landlord in the same condition / state of maintenance as when the tenancy agreement / inventory is first signed. This is an accepted requirement regardless as to whether or not the tenants have chosen to take advantage of the garden facilities.

Inventory & Schedule of Condition reports / Check-Ins

As many as 70% of letting agents don’t do a formal check-in procedure which can have disastrous repercussions for the landlord. When a tenant moves into a property he / she should accompany the inventory clerk on a tour of the property to agree the content of the inventory report – and where necessary, the clerk will record any agreed amendments(such as items listed but not found to be present in the property, a difference in opinion ref cleanliness or damage).

Any outstanding issues should be noted on the check-in report e.g. missing manuals, further cleaning required, missing keys, any other concerns. The inventory and check-in report should be signed by both parties ideally on the day the tenant moves in.

Problems often occur where letting agents fail to chase-up receipt of these signed documents when a formal check-in has not taken place, since the tenant can potentially make changes to the property during that period which will then not be listed on the original inventory / check-in reports.

Interim Property Visit reports

Visits to check on the condition of the property should be undertaken every 3-4 months. Not only is this often not undertaken within the agreed time frames, all too often property visit reports fail to document key changes which will have an impact on the acceptable level of wear and tear of the property.

Photographic evidence / receipts / estimates which will provide evidence of problems that have been identified / rectified by the tenant should all be included in the interim property visit report.

Equally, if a landlord is required to replace an item which has broken down during the tenancy e.g. a washing machine, this must be noted on the interim property report and added to the inventory as an addendum – failure to do this could result in the original damaged item being e re-instated and the tenant having access to a brand new washing machine!

Disputes relating to fair wear and tear often centre around common themes which include:

Cleanliness

What one person sees as acceptably clean may be considered to be well below standard by another. The important point to remember when it comes to assessing cleanliness is that agreement is reached at the check-in stage. For instance, if a property was noted as dirty at the check-in and either the agent or landlord arranged for professional cleaning to be carried out after the check-in, then the tenant is required to ensure that the property is vacated in a professionally cleaned condition.

The landlord or agent must to ensure the receipt for the professional clean at the check-in is provided, although the tenant must be given the opportunity to clean the property to a professional standard themselves at the end of the tenancy should they wish to do so.

A good rule of thumb is for landlords to invest in a professional clean before the tenancy begins, which extends to the overall cleaning of the property (walls / sinks / toilets etc) as well as to carpets and ovens.

Fixtures and fittings

Tenants need to be made aware of the fact that if they choose to introduce new items, which need to be fixed to the walls, agreement must be received from the landlord in advance. Failure to do this will result in the landlord asking for these items to be removed and making a claim to restore the wall back to its former state.

Brand Appeal

Most items in the property will have a pre-determined life-span but this will also be influenced by the quality of the product, accepting that certain brands have an enhanced reputation for withstanding wear and tear, which is usually evidenced by an extended warranty.

If a landlord chooses to furnish the property with cheaper, non-branded goods, it is only fair to accept that these may not last the duration of the tenancy.

Failure to observe the this guidance may result in the break-down of what should otherwise be a harmonious relationship between landlord and tenant – and most importantly, will also be the start of a lot of inconvenience and the enormous distraction of a potential dispute case.

No Letting Go is the UK’s premium national inventory management company. For further information on professional inventory management service across the UK, please contact No Letting Go on 0845 659 9980 or visit our website at www.nolettinggo.co.uk

The Latest accommodationforstudents.com research shows increase of 4.3% on last year –

(London, 9/8/10) The latest research from accommodationforstudents.com (afs), the UK’s No 1 student accommodation website, shows a sharp increase in student rents in 2010. The average weekly student rent now stands at £65.30, 4.3% higher than last year (£62.61). The previous two years’ increases were just 1.6% and 1.7%. Since 2004, when the average rent was £52.44, rents have risen 25%.

Rents are highest in the South East, which hosts 8 out of the 10 most expensive student locations. London leads the way with an average rent of over £100 per week, with Guildford, Uxbridge, Cambridge, Middlesex, Egham and Brighton all weighing in with rents of over £80 per week (see full table below).

accommodationforstudents.com has published its latest table of student rents throughout the UK to coincide with the A-Level results which come out on Thursday, 19^th August, 2010. The stats are based on nearly 60,000 properties in 83 cities across the UK.

Some traditional English redbrick universities: Liverpool (£55.49), Birmingham (£57.30), Manchester (£60.12), and Sheffield (£60.14) are still below the average UK weekly student rent of £65.30.

Best value locations in terms of student rental accommodation are Middlesbrough, Stoke-on-Trent and Stockton with average weekly rents of £41.47, £42.65 and £44.71 respectively.

Simon Thompson, co-founder and director of Accommodation for Students, said:

“Students who are going through the Clearing process are unlikely to be able to find university accommodation for their first year and so it is really helpful to know precisely how much they will have to pay for private rented accommodation.”

accommodationforstudents.com has over 750,000 registered students. It is top of the UK search engines and receives over 475,000 visitors per month, with an average site visit time of over 7 minutes.

Thompson added:

“Minimum down payments for buy-to-let mortgages are now 20-25% – it really has become a cash buyers’ market! With more equity now tied up in their properties many landlords have been forced to increase rent in order to make a return on investment.”

APPENDIX

UK Student Rent Analysis, July 2010 (83 cities/59,368 properties)

About accommodationforstudents.com

accommodationforstudents.com (www.accommodationforstudents.com) is the UK’s number one No.1 student accommodation website, designed to provide students with one central comprehensive source of information on student accommodation.

accommodationforstudents.com was founded in 2000 by Simon Thompson and William Berry. It provides a powerful search engine accessing a nationwide database of student accommodation which enables students to find properties, private halls and housemates fast. Students can now also deposit their accommodation requirements using the site’s ‘Property Alerts’ service and get properties e-mailed to them on a daily basis that match their requirements. The landlord admin suite interface allows landlords to directly upload and edit their property details and pictures on to the site which allows for ease of communication with students.

accommodationforstudents.com was nominated for Best Use of Web in the 2005 and 2004 New Media Age Awards and was highly commended in the Best Industry Innovation category at the inaugural 2002 Property Business Awards. In June this year Simon Thompson was named one of the top 40 business people in Manchester, courtesy of the Crains Manchester Business Paper 40 under 40 awards. Co-founder William Berry also won the 2006 BT Essence of the Entrepreneur award for the site.