Are dilapidation payments at the end of a lease subject to VAT in the UAE?
It depends on the lease. The FTA real estate guide says dilapidation payments made as damages for breach of a duty to maintain the property may be outside the scope of VAT. If the payment is consideration for repairs the tenant should have done and the landlord will now do, it is a supply and taxed at 5%.
On this page
Reading the lease
The wording of the reinstatement clause decides it. A clause that sets an agreed sum for the landlord to carry out works points to consideration; a claim for loss from the tenant's breach points to damages.
For reinstatement contractors
The contractor carrying out the reinstatement charges 5% on its services to whoever engages it, whatever the VAT treatment of the payment between landlord and tenant.
How SupaJack Construct helps
Reinstatement works can be run as their own project, with costs, certificates and invoices kept together, so the commercial record behind any dilapidations settlement is available.
Related tools and guides
See the VAT guide for contractors, the VAT calculator, the payment certificate calculator, the retention calculator, finance and VAT in SupaJack Construct, the answer on whether a payment certificate triggers VAT and the meaning of e-invoicing.
Worked example
At lease end a tenant pays the landlord AED 180,000 agreed under the lease for the landlord to repaint and replace flooring. That is consideration for repairs, so VAT of AED 9,000 applies. A court award for breach of the repair covenant may be outside VAT.
Questions people ask
Are all dilapidation payments taxed?
No. Damages may be outside VAT.
Is a payment for the landlord to do repairs taxed?
Yes, at 5%.
Does the reinstatement contractor charge VAT?
Yes, on its services.