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HMRC internal manual

Business Income Manual

Specific deductions: dilapidations under a lease: composition payment to lessor

On the expiry of a lease of business premises the lessee, instead of making good dilapidations, may agree with the lessor to pay a sum by way of composition; in other words, a payment to get out of the obligation to make good the dilapidations.

  • To the extent that it reflects deferred repairs, and would have been allowable if spent during the lease period, such a composition payment may be allowed.
  • To the extent that a composition payment reflects capital costs (outlined in BIM43255) it is not deductible.

If necessary the sum should be apportioned to allow only the estimated cost of dilapidations that would fall within the guidance in BIM43260.

The deduction of a payment by way of composition with the lessor is not conditional on the dilapidations being made good.

A composition payment may be a revenue expense paid (wholly or partly) for trade purposes even where the trade is continued in different premises (see Hyett v Lennard [1940] 23TC346).

Timing of deduction

A composition payment is by nature a payment of compensation for not carrying out accrued repairs. It is not repair expenditure as such; the lessor may never in fact carry out the repairs. The payment is allowed for tax purposes when it is brought into the accounts in accordance with GAAP.

For guidance on the timing of deductions generally, see BIM42200 onwards.