Why tenants should include a dilapidations provision in their accounts

With inflation at its highest rate for 30 years and costs spiralling out of control for households, consumers and businesses, the cost-of-living crisis is hitting home for everyone.

For a commercial or leisure property tenant, dilapidations liability - a cost that can be both planned and budgeted for, is often a missed opportunity…

Did you know?

Companies may be able to reduce their Corporation Tax liability by including future dilapidations in their accounts.

FRS 102 – a tax incentive

As explained in our earlier blog, dilapidations are when a landlord makes a claim against a tenant for the cost of putting the property back in a good condition when the lease comes to an end.

The Financial Reporting Standard (FRS 102) allows future dilapidations liability to be included as an expense in a profit and loss account. This means that a deduction can be made within the company’s tax calculation.

This can be a very welcome boost for cash flow, but it also allows for sensible financial planning to ensure funds are available at lease expiry/break.

An increasing number of corporate tenants take advantage of FRS 102, to:

• reduce the risk of not having the money needed to meet a dilapidations bill at lease expiry/ lease break
• reduce annual Corporation Tax payments during the currency of the lease
• improve cash flow by freeing up more cash to invest in the business

However, it is a balancing act!

Too high a provision risks breaching FRS 102 rules and could take an excessive sum of money from use within the business.

So, what do you do?

It is important to get professional FRS 102 advice and to get a dilapidations assessment using both a Chartered Building Surveyor and a Chartered Valuation Surveyor.

• The Chartered Building Surveyor is required to identify breaches of lease covenants to repair, decorate and reinstate alterations and provide a total cost to remedy. This total is often entered in the accounts as the dilapidations provision This figure is likely to be more than what the eventual true liability would be if the tenant company was to employ the Diminution in Value defence (Section 18) in dilapidations negotiations at lease expiry/break date.
• This is where the Chartered Valuation Surveyor is required to advise to what extent that total could realistically be lowered by using the diminution in value (section 18) defence. Tenants can then take an informed view on which figure within that range best protects and suits their business.

Dilapsolutions automatically provides BOTH types of surveyors, helping businesses budget years in advance of the dilapidations claims which come at lease expiry. Using FRS 102 to set a sum aside each year to accrue, reduces net profit, and in turn, Corporation Tax, and in addition, guarantees the lowest possible settlement sum when a dilapidations claim is made by a landlord.

If you would like to find out more about FRS 102 and reducing your Corporation Tax, please get in touch here.