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FRS 102 Services for Accounting

As commercial and leisure property tenants, companies may be able to make a provision to reduce their Corporation Tax liability by including future dilapidations in their accounts.

FRS 102 Advice

Under section 21, FRS 102 allows a company to make provision for known dilapidations liability within their financial statements. This helps reduce corporation tax liability.

With the right FRS 102 Accounting plan in place, it will not only welcome a boost to cash flow but allows for sensible advance planning, to ensure the funds are available at lease expiry/break.

But it is a balancing act; too high a provision not only risks breaching the Rules but could sterilise an excessive sum of money from use within the business.

Chartered building surveyors to assess and negotiate the cost of remedial works, and

Chartered valuation surveyors to apply the statutory cap (S18 of the Landlord & Tenant Act 1927 in England & Wales and S65 of the Landlord & Tenant (Amendment) Act 1990 in Ireland).

The cap means that the compensation due to a landlord for breached covenants to repair (decorate and reinstate alterations) will be the ‘lower of the cost of remedial works OR the impact (if any) upon the property’s freehold value.'

Benefits Of FRS 102 Dilapidations Liability Assessments

An increasing number of corporate tenants take advantage of the significant benefits offered by FRS 102, to:-

  • Reduce the risk of not having the money required to meet a dilapidations bill at lease expiry/ lease break
  • Legitimately reduce annual Corporation Tax payments during the currency of the lease
  • Improve cash flow - freeing up more cash than otherwise to invest in the business

But it will be appreciated that employing FRS 102 to best effect for the Company is a balancing act. Dilapidations assessments are traditionally, and initially, prepared by Chartered Building Surveyors – the discipline of a chartered surveyor who identifies breaches of lease covenants (to repair, decorate and reinstate tenant’s alterations) and prices their remedy. Often this resultant total is entered in the Accounts as the provision for dilapidations.

However, assuming accurately assessed, this figure is likely to be well in excess of what the eventual true liability will be if the tenant company was to employ the Diminution in Value defence (Section 18) in dilapidations negotiations at lease expiry/break date. As explained at Valuations & Diminution in Value this invariably serves to ‘cap’ the damages for dilapidations payable to a landlord to notably less than the (lowest) Cost of Works assessment.

A higher than necessary/realistic provision in your Accounts might of course achieve greater tax relief, but that may be pyrrhic relative to the amount of excess cash duly tied up and thus sterilised from use within the business.

THAT is why dilapidations assessments should always be made by both disciplines of chartered surveyor necessary for accurate dilapidations assessments. The Chartered Building Surveyor to, as is always required, identify breaches and price remedies. Then, the Chartered Valuation Surveyor (Valuer), to advise to what extent that resultant total might realistically be lowered, or reduced, by use of the Diminution in Value (Section 18) defence.

You can then take an informed view on which figure within that range best protects and suits your company.

As the only dilapidations consultancy employing both disciplines of dilapidations surveyor – the Chartered Building Surveyor and the Chartered Valuation Surveyor – we are uniquely placed to provide you with that complete advice to consider for FRS 102 purposes.


Chartered Surveyors

We are the only dilapidations consultancy in the UK & Ireland that provides both Chartered Building and Valuation Surveyors, ensuring the best results for our clients.

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