For finance directors of tenant businesses
Dilapidations Provision: Accounting, Tax and VAT
Sviatoslav JerdetchiiCEO & Founder of Craftex. Updated , 6 min read
The short answer
A dilapidations provision is the amount a tenant sets aside in its accounts for the repair and reinstatement it will owe when the lease ends. It is recognised when the obligation exists, the cost is probable and it can be estimated reliably.
- Reinstating your own fit-out is usually provided for from the start, as part of the right-of-use asset.
- Wear and tear builds up over the lease, so that part of the provision grows year by year.
- Deferred repairs are usually tax-deductible; reinstating your own alterations usually is not.
- A dilapidations payment to the landlord is outside the scope of VAT.
A dilapidations provision is the amount a tenant sets aside in its accounts for what it will owe the landlord when the lease ends. That covers repair, redecoration and putting back the premises as the lease requires.
For many businesses it is one of the largest liabilities on the balance sheet that nobody looks at until the lease is nearly over. Then the landlord's schedule arrives, and the provision turns out to be a guess.
This guide covers why tenants provide for dilapidations and how FRS 102 and IFRS 16 treat them. It then covers the estimate, tax, VAT and how to bring the figure down. It is written by builders who price these works, not accountants. For a dilapidations claim review with real prices, get a priced estimate.
Why tenants provide for dilapidations
Most commercial leases make the tenant responsible for repair and for putting back any alterations at the end. That is a real obligation, and it grows the longer you occupy and the more you change.
| Source | When it arises | Example |
|---|---|---|
| Reinstatement of your fit-out | When you install it | Partitions, kitchens, raised floors to remove |
| Wear and tear | Over the life of the lease | Worn carpets, damaged ceilings, tired finishes |
| Redecoration | Usually in the last year | Walls and ceilings repainted as the lease asks |
| Plant and services | As they age | Air conditioning or lighting at the end of its life |
A provision spreads the cost across the years that cause it. Without one, the whole cost hits the profit and loss account in the year you leave.
FRS 102 and IFRS 16 treatment
The accounting rules decide when the provision goes on the balance sheet and where the cost goes. Your auditors make the final call.
When to recognise a provision
FRS 102 section 21 says a provision is recognised only when three things are true. There is an obligation at the reporting date from a past event. Paying is probable, meaning more likely than not. And the amount can be estimated reliably.
Reinstatement of your own fit-out
The obligation to remove your alterations arises when you put them in. Under IFRS 16, the estimated cost of restoring the premises as the lease requires is part of the cost of the right-of-use asset. A matching provision goes on the balance sheet, and the cost is depreciated over the lease.
FRS 102 now works the same way. Its September 2024 edition brings lessee accounting into line, for periods beginning on or after 1 January 2026.
Wear and tear
Repair obligations build up as you use the premises. That part of the provision usually grows year by year, with the cost charged to profit as it accrues.
Estimating the provision
A provision is only as good as the estimate behind it. Many are set by a rule of thumb per square foot. That is quick, but it can be far from what the landlord will claim.
A better estimate starts from the documents and the building:
- The lease and licences. What must be repaired, redecorated and reinstated, and to what standard?
- The schedule of condition. What state were the premises in when you took them?
- Your alterations. What did you add, and what must come out?
- A walk-round. What is actually worn, damaged or near the end of its life?
- A priced schedule. Each item priced as a builder would, not as a percentage.
Our own RICS-qualified quantity surveyor prices each line from current builders' rates. Because our own crews do the work, the figure is one we would build for. That gives your auditors a number with evidence behind it.
Review the estimate every year. Update it when you alter the premises, when prices move, and as the lease end gets closer.
Accounting entries and tax treatment
The entries follow the two kinds of obligation: reinstatement of what you installed, and wear and tear that builds up over time. Your auditors confirm the detail for your lease and your accounting framework. The pattern below is the usual one, and it is why a reliable cost estimate matters from the first year, not just the last.
| Event | Typical entry |
|---|---|
| Fit-out installed, reinstatement owed | Add the estimated cost to the right-of-use asset; credit the provision |
| Each year of the lease | Depreciate the asset; unwind any discount on the provision |
| Wear and tear builds up | Charge the cost to profit; credit the provision |
| Estimate changes | Adjust the provision, and the asset where it relates to reinstatement |
| Lease ends and you pay or do the works | Use the provision; any difference goes to profit |
Tax relief and VAT
The tax and VAT treatment depends on what the money pays for. Take advice from your tax adviser, but the HMRC guidance sets the frame.
Corporation tax
HMRC's Business Income Manual splits dilapidations into two kinds:
- Deferred repairs. Usually deductible, to the extent the repairs would have been allowable if done during the lease.
- Capital items. Not deductible. Examples include rebuilding, or demolishing a structure the tenant added.
A cash payment to the landlord instead of doing the works is a composition payment. HMRC allows it to the extent it reflects deferred repairs, apportioned if necessary. Relief follows when it is brought into the accounts under GAAP.
VAT on dilapidations
HMRC VAT Notice 742 says a dilapidations payment is a claim for damages for want of repair. It is not consideration for a supply, so it is outside the scope of VAT.
| How you settle | VAT position |
|---|---|
| Cash payment to the landlord | Outside the scope of VAT (Notice 742) |
| Works done by your own contractor | VAT charged on the works as normal |
The Dilapidations Protocol also asks the landlord's quantified demand to say whether VAT applies. Check it does not add VAT to a damages payment.
Fuse Energy hired Craftex on the fit-out and installation of our engineering and research centre, which included electrical, heating, lighting, plumbing, and ventilation upgrades. They delivered everything to a high standard and were proactive throughout — even working weekends to help speed up the programme, despite not being contracted to. They managed last-minute changes very well, communication was clear and consistent, and the team was professional from start to finish. We’d happily recommend Craftex to anyone needing a reliable construction partner.
Reducing the provision before lease end
A provision is not fixed. The decisions you make in the last years of the lease can move it a long way.
- Keep up repairs. Small repairs done on time cost less than schedule items priced at the end.
- Agree what stays. A landlord who wants your partitions or kitchen left in place removes them from the claim.
- Reuse before you strip. Furniture, lighting, racking and equipment can move to your next premises or be resold.
- Use the section 18 cap. Repair damages cannot exceed the fall in value of the landlord's interest.
Our guide to the section 18 valuation explains how the cap works. One team, one point of contact: we price the claim, negotiate with your landlord and do the reinstatement and strip-out ourselves.
When the lease ends
At the end, the provision meets the real claim. If it was built on a priced schedule, the gap is small. If it was a rule of thumb, the gap can be large either way.
Releasing an over-provision helps profit. An under-provision hurts it in the year you leave. Either way, the best protection is to know the real cost early.
Planning a move or a lease end in the next two years? Get a priced estimate before your next year-end.
Building a dilapidations provision
- Read the lease, licences and schedule of condition.
- List every alteration you have made.
- Walk the premises and note wear and damage.
- Price each item as a builder would.
- Split repair from reinstatement for tax and the section 18 cap.
- Review the figure every year-end.
