A Dilapidation claim is essentially the cost of future expenditure on a premises repair and can be used as relief against corporation tax
Dilapidation is one of the ways that an existing asset can be used to reduce the tax burden on a business.
With costs and inflation rising in a time of economic uncertainty, commercial tenants will need to take advantage of the benefits of Financial Reporting Standard 102 (applicable in the UK and Ireland).
This allows companies with leasehold premises to offset their future dilapidations liabilities. These can be accrued as an expense and excluded from tax computations.
How do you get Tax Relief for Dilapidations?
As an occupier, under FRS102, dilapidations costs can be charged to the profit and loss account over the life of a lease. This will avoid a large one-off cost to profits at lease expiry.
Dilapidations costs will therefore be an allowable relief for corporation tax purposes, deductible from a companies profits. This will reduce Corporation Tax payments during the lease term and therefore improve cashflow.
The starting point is the preparation of a comprehensive dilapidations assessment prior to claiming any tax relief. This is best prepared early in the lease term to gain the maximum benefit . However it can be carried out at any time.
To ensure the dilapidations assessment is correctly prepared, an experienced building surveyor is required to review relevant lease documentation, inspect the property and assess the potential dilapidations claim at the expiry of the lease.
This requires careful consideration of each element of the property and what state of repair it is likely to be in at lease end.
Alterations undertaken by the occupier will also need to be considered. The costs associated with reinstatement should be assessed to reflect the condition of the building at lease commencement.
Costing Dilapidations for Tax Relief
It is essential that accurate costs are used to calculate dilapidations liability. This will ensure that a realistic liability figure is included within a company’s accounts. This can involve using recognised cost data and recent tender returns for similar works actually carried out.
Often occupiers rely on a rule of thumb for typical dilapidation costs, such as a rate per sq metre/foot. For these situations accuracy is key. It is not sufficient to use a per sq metre/foot rate. This is because such a rate is unlikely to take account of the nuances of either the building’s fit out or specific lease obligations.
Estimated assessments can often be up to 50% out. This will affect the profit and loss accounts of the business over the term of the lease.
More significantly, when an under-estimated cost is crystallised at lease expiry, this can impact on that year’s accounts and ultimately the financial strength of the business at the time.
Taking early strategic advice on dilapidations can benefit occupiers, significantly helping them mitigate their financial exposure.
This is especially evident where tenants inherit commercial property through company acquisitions or via sub-tenancy arrangements. Often in such instances tenants are completely unaware of the potential dilapidations liability.
Want to know more? Find out how dilapidation assessments have been impacted with Covid-19.
Our expert dilapidations team have extensive experience of dealing with all dilapidations matters. We act for both landlords and tenants, ensuring a global approach to the dilapidations process.
Our team have extensive experince in preparing compliant dilapidations liability assessments for tax relief.
As with all financial matters, it is essential that advice is also sought from a qualified accountant in relation to using FRS102.
See our Dilapidations Fact Sheet for more information.
Also see our recent article on Commercial Lease Repair Obligations.
We assist commercial landlords and tenants on all aspects of lease obligations, repair and dilapidations. We provide specialist surveys, new lease schedules of condition and general dilapidations advice.
BSc (Hons) MRICS