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Dilapidations – an opportunity for tax relief?

Martin Smith / 11 Dec, 20

Financially this year has been somewhat more challenging for businesses due to the Covid pandemic and companies are beginning to feel the pinch of months of lockdown applying further financial pressures. The Government’s Furlough scheme provided some support but there are still a number of other financial boons on offer from the government to supplement the already offered income, as discussed below.

This brings us onto the exciting world of tax and making benefit of assets that are held with a business in order to off-set tax payments to the Government at the next reporting quarter/financial year end. There are various ways that one can use the existing asset to reduce tax burdens to businesses and this can take various forms.

What’s more, whilst businesses may be aware of such tax breaks, it is important to know that such benefits can only be claimed once during the ownership of that asset. These may have been saved up for a rainy day and if that’s the case, the Covid pandemic may represent a heavy storm.

Dilapidations

A business’ dilapidations liability (applicable to ALL tenancies) may be recorded in business accounts as a ‘liability’ that is therefore deductible from Corporation Tax calculations. The Financial Reporting Standard (FRS) 102 (previously FRS 12) allows companies to do so based on a reliably formulated estimate. Such estimates may take the form of either the cost of the works to remedy any breach in repairing, decorating or reinstatement obligations OR a reduction in the property’s capital value consequential to breaches in those lease covenant. In reality, the vast majority of leased premises will have some form of ‘breach’ of their lease’s ‘dilapidations’ clauses and therefore opportunity exists for business’ to deduct such liability from their tax calculations.

To that end, business’ can thoroughly assess where those breaches exist and calculate the value of their remedy, or obtain diminution valuations (also known as s18(1) valuations) to ‘reliably assess’ the amount applicable.

Under the FRS 102, Section 21 covers “Provisions and Contingencies” and it is under this section that dilapidations may be considered.

In order for a dilapidations liability to be allowable, it requires meeting certain criterion; notably i) that it requires to have been in the past (i.e. the signing of the lease), that a liability exists (i.e. assessed b reliably), and (iii) that the amount is likely to be applicable (i.e. that a landlord is likely to make a claim at lease end). In most circumstance, the business may meet this criterion.

Repairs

Businesses may also calculate the cost of repairs undertaken to an asset and make provision of the cost of those repairs (also known as ‘specific deductions’) and are normally classed as an “allowable expenditure”, therefore being subject to tax benefits.

Care needs to be taken when applying this, as if the ‘repair’ was deemed to be an ‘improvement’ to the building, this would be classed as Capital Expenditure and therefore not be an “allowable expenditure”, or tax deductible. Assessing whether the repair does constitute as an improvement or not it the critical item here and needs some thorough and considered thought.

Alterations

As discussed above, if during tenancy of the property a tenant has applied alterations that may later form a claim against them at lease end, businesses may evaluate the cost of reinstating the property and apply this to their tax returns as an allowable expense and therefore it will be tax deductible.

Capital Allowances

Property capital allowances can be applied to the reduction in value of any asset, most commonly fixed installations within a building and comprise fixed plant and equipment essential to the running of the operation or building and include things like lifts, boiler and heating systems, fire alarm systems, electrical installations, even plant and machinery. The extent of value depreciation in these items can be assessed accurately and such a value reduction may be written off against the taxable income of a business.

Of course, where buildings are new and new structure and buildings allowances are applied, the services installations within those buildings may still apply for additional capital allowances.

Annual investment allowances of 100% of the value of plant and machinery up to a limit of £1m may also be applicable here, for green systems.

For new build and refurbishment projects capital allowances can be applied for the same energy efficient systems in order to recover costs of monies expended on such works. Assessments of the cost of those systems can be made and applied to be tax deductible costs.

Caution is applied here as the FRS contains a specific list of system to which this is applicable.

An accurate valuation on the cost of these installations and indication as to anticipated lifespan would also be required in order to insert appropriately calculated figures into your tax return and allow businesses to claim benefit of those capital allowances.

Summary

When compiling this year’s tax returns it is important to consider any assets that you may have and which may intrinsically hold within them numerous tax deductible elements. Such savings may be an opportunity to reduce any tax bills incurred during what has been quite a difficult and challenging 2020/2021. Sanderson Weatherall were able to provide you with detailed advice on Dilapidations Liability, Cost of Work, diminution valuations and Plant and Machinery valuations and would be glad to assist any clients, both landlords and tenants as required in order to assist them doing so.

In relation to dilapidations liability offsetting, as such allowances tend only to be applicable once in the life of an asset, these may relate to previous years’ liability as opposed liability acquired this financial year and therefore these “savings” may indeed prove useful to claim at this end of a difficult period, providing a cash boost to businesses for whatever may come in the next financial year.

Each individual case will be different and we advise that each company seeks advice from their tax advisers.

Get in touch with Martin Smith at martin.smith@sw.co.uk or on 07730 212391 for more information.

 

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