Watts Service Focus

Your dilapidations liability and FRS 12

Corporation tax incurred by private companies, specifically tenant occupiers, can be an area of missed opportunity without the correct advice on any future dilapidations liability.

In respect of commercial operating leases, the Financial Reporting Standard 12 (FRS 12) allows for a future dilapidations liability to be termed as an expense which can be included within the profit and loss account of the firm. It will then be excluded from the company’s tax computation until it is spent.

The absence of profits in the current market means that reducing tax burdens may not be a high priority for all operators at present. However, it is an issue that should be more widely discussed and understood to ensure that the clients of accountants and surveyors are aware of the potential benefits.

A tenant’s dilapidation provision is deductible for corporation tax purposes if certain FRS 12 criteria are met as follows:

  • The business is under a present legal or constructive obligation – Ordinarily this would require a signed lease contract, which gives rise to a legal obligation for the tenant to carry out certain reinstatement, repairs and redecoration works over the term of the lease.
  • The legal obligation is as a result of a past event – In respect of leasehold occupation of a property, this would ordinarily constitute the end of the lease.
  • Transfer of economic benefits arising from legal obligation – Following assessment and advice, it would need to be demonstrated that expenditure would be required to complete dilapidation works to comply with the lease obligations, or make a payment to the landlord for damages.
  • Reliable estimate of cost – A professional assessment of the cost of dilapidation works is provided together with robust supporting evidence.

A professionally prepared review of anticipated dilapidations liability, specifically geared to FRS12, is a valuable tool for all tenants, to enable a case for deduction of dilapidation liability to be made once their lease ends. Preparing such a document in advance will also benefit tenants in developing a strategy for vacating their premises and defending any claim from the landlord associated with the lease end.

For more information, contact Ian Laurie, Director at Watts Group on 0161 831 6180.

 

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