Dilapidations & repairs get the tax treatment

Repair obligations can represent a major overhead for tenants and landlords alike. However, the tax and accounting treatment concerning expenditure on property dilapidation work and repairs can represent some respite says commercial property specialist Underwoods, although is quite often misunderstood.

Payment for dilapidations on the termination of a lease should be tax deductible. However, HMRC’s view is that if the payment is not used by the landlord for ‘genuine repairs’ or if the expenditure ‘restores the building to its original state by rebuilding or dismantling items previously altered by tenants’, it is disallowable.

Craig Mattocks, a Partner and Head of Building Surveying Services, says: “HMRC guidance states that expenditure by a tenant on making good dilapidations at the expiry of a lease is an allowable deduction if the work relates to deferred repairs - i.e. where the cost of such repairs would have been allowable if executed during the currency of the lease.”

He adds: “However, where dilapidations are incurred by a new tenant as a condition of the grant of a lease, or by an existing tenant as consideration for the grant of a new lease - not in satisfaction of his obligations under the old - the payment will be capital and therefore disallowed. Any element of improvement will also be disallowed as capital expenditure.”

The mere fact that you buy a property not long before the repairs are carried out does not in itself make the repair a capital expense. However, a change in ownership combined with one or more additional factors may mean the expenditure is capital. For example: if a property is acquired which is not in a fit state for use in the business until the repairs are carried out, or which cannot be let without making the repairs, then such expenditure would be disallowed as capital. The same would apply if the price paid for the property was substantially reduced because of its dilapidated state.

Provisions for ‘anticipated’ losses such a future rent payable on surplus business premises, or provisions made for future expenditure such as repairs to trading premises prior to work being carried out, will be treated as allowable deductions provided conditions are satisfied. A provision will also be allowed for dilapidation work required under the terms of a lease which contains a repairing obligation.

Craig Mattock concludes: “There is a whole host of case law which has determined what is and what is not an allowable repair. Where it is not clear whether an item of expenditure should be allowed or not, it will be necessary to review case law to help decide the correct tax treatment. It is therefore advisable to seek professional advice before buying a property or embarking on a programme of repairs to an existing property.”