FINANCE
Dilapidations – an opportunity for tax relief ?
Sanderson Weatherall partner David Fairley provides some key thoughts for tenants when it comes to dilapidations .
2020-21 has been more challenging for businesses than any time in living memory due to the Covid pandemic , with months of lockdown leading to significant financial pressures .
While the government ’ s furlough scheme has been extended due to continued restrictions , it is possible to offset tax payments against assets at the next quarter or financial year-end , noting that these benefits can only be claimed once during the ownership of that asset .
Dilapidations All tenants should be aware of the potential for a claim raised by their landlord for dilapidations , either at the end of their lease term or at an interim date part way through the lease . Essentially , a dilapidations claim indicates the costs required to rectify any breaches of the tenant ’ s repairing obligations , as set out under the terms of the lease .
A businesses dilapidations liability ( applicable to all tenancies ) may be recorded in business accounts as a “ liability ” that is deductible from Corporation Tax calculations . The Financial Reporting Standard ( FRS ) 102 ( previously FRS 12 ) allows companies to do so , based on a reliably prepared estimate .
Section 21 of FRS 102 covers “ Provisions and Contingencies ” and it is under this clause that dilapidations may be considered . Accordingly , for a dilapidations liability to be allowable , certain criteria must be met :
1 . That the tenant has an obligation at the reporting date as a result of a past event – in this instance , the signing of the lease ,
2 . That a liability exists which has been assessed reliably , and
3 . That the amount is likely to be applicable ( ie , that a landlord is likely to make a claim at lease end ). In most circumstances , the business will meet this criteria . To this end , businesses should undertake a detailed assessment of where those breaches exist and calculate the value of their remedy or , obtain diminution valuations in accordance with S18 ( 1 ) of the Landlord and Tenant Act 1927 to “ reliably assess ” the amount applicable .
Repairs Businesses may also calculate the cost of repairs undertaken to an asset and make provision for the cost of those repairs , also known as “ specific deductions ”. These are normally classed as an “ allowable expenditure ” and are therefore subject to tax benefits .
Care needs to be taken when applying this rationale , as , if the “ repair ” was deemed to be an “ improvement ” to the building , then it would be classed as capital expenditure and therefore not an “ allowable expenditure ”, or tax-deductible . Assessing whether the repair constitutes an improvement , is , therefore , the critical element and needs thorough and considered thought .
Alterations If during the term of a lease a tenant has undertaken alterations that may later form a claim against them at lease end , then businesses may evaluate the cost of reinstating the property and apply this to their tax returns as an allowable expense and therefore a tax-deductible consideration .
Capital Allowances Property capital allowances can be applied to the reduction in the value of any asset . Most commonly , these are fixed installations within a building comprising plant / equipment and mechanical and electrical installations essential to the running of the operation or building .
Where new structure and buildings allowances are applied , the services installations may still be eligible for additional capital allowances of 100 per cent of the value of plant and machinery up to a limit of £ 1m .
Summary When compiling this year ’ s tax returns , it is important to consider any assets that you may have and those which may intrinsically hold within them numerous taxdeductible elements . Such savings may be an opportunity to reduce any tax bills incurred during what has been a difficult and challenging 2020 / 2021 .
Sanderson Weatherall can provide you with detailed advice on your potential dilapidations liability , cost estimates associated with a potential claim , diminution assessments in accordance with s18 ( 1 ) and plant and machinery valuations , and would be happy to advise both landlords and tenants to assist them in doing so .
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