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HMRC internal manual

Business Income Manual

Specific receipts: reverse premiums: fitting out costs

Where the landlord undertakes to meet fitting out costs, the tenant is receiving a reverse premium.

Fitting out costs means expenditure on the provision of fixtures and chattels to equip the building to serve the tenant’s particular needs. Such expenditure is normally the tenant’s responsibility. The landlord may meet the cost directly (by paying the supplier and any installation costs) or indirectly (by reimbursing the tenant). If the reimbursement is of fitting out costs otherwise qualifying for capital allowances in the tenant’s hands, see BIM41090.

It may be necessary to distinguish here between the cost of providing such fittings as are necessary to make a building ready to let and the cost of meeting what are properly the tenant’s expenses of fitting out. The former is not a reverse premium, the latter is.

For example, a landlord may buy an office block for £100 million and let it to a tenant for a market rent. The expenditure by the landlord on buying the office block is not an inducement to the tenant to take a lease of it. Similarly, if a landlord agrees to make available to a tenant a partially completed building, and to pay the tenant a sum effectively to complete the building on the landlord’s behalf, the sum paid is not a reverse premium. Say the tenant wants a specialised roof that is more expensive than the standard kind the landlord planned to install. The parties may agree that the tenant will install and pay directly for the roof. The landlord will reimburse the cost of the standard roof. That reimbursement is not a payment by way of inducement to take a lease because it is part of the cost of producing a finished building.

It should usually be clear what expenditure procures a finished building and what represents tenant’s fitting out costs. As a rule of thumb, the latter will not increase the value of the reversion, because it will be worthless to the landlord when the lease ends. An example would be shop counters. Another rule of thumb is that expenditure on fitting out costs will not fall to be taken into account in fixing market rent on a rent review. In the roof example, the installation of a roof, which will remain of value to the landlord when the lease ends, will enhance the value of the reversion and affect the outcome of a rent review.

It is possible that a landlord will meet a tenant’s expenditure directly but be reimbursed in some way by the tenant. This will not create a benefit caught by the legislation. For example, the rent may be fixed at a level enhanced to take account of the additional value to the tenant of a building fully equipped with tenant’s fixtures. The extra rent reimburses the landlord for the additional value. Hence, the tenant has received no benefit.