A tenant provides for dilapidations when the lease creates an obligation to repair or reinstate and the event that triggers it has already happened, such as alterations already made or deterioration that has already occurred. The provision is the best estimate, discounted where material, of what the tenant would rationally pay to settle that obligation at the reporting date, not the cost of a full refurbishment at the end of the lease. For periods beginning on or after 1 January 2026, FRS 102 adds restoration costs required by a lease to the cost of the right of use asset when the obligation is incurred.

What are dilapidations?

HMRC describes dilapidations at BIM43250 as works of repair or reinstatement for which a lessee is liable. In a typical full repairing lease of commercial premises they come from three sources: covenants to keep the premises in repair during the lease, covenants to yield them up in a stated condition at the end, and obligations to remove alterations the tenant has made, such as partitions, mezzanines or shop fits, and put the premises back as they were. The landlord usually serves a schedule of dilapidations near the end of the lease, but the accounting obligation can exist many years earlier.

The accounting rules come from FRS 102 Section 21 (see FRS 102 Section 21: provisions and contingencies) together with Section 20 on leases and Section 17 on property, plant and equipment.

When does a tenant have to recognise a provision?

A provision is recognised under paragraph 21.4 only when there is a present obligation from a past event, an outflow is probable and the amount can be estimated reliably. Applied to a lease, the question is what has happened by the reporting date:

  • Alterations already made. If the lease requires the tenant to remove its fit out and reinstate the premises, the obligation arises when the alteration is installed. The full estimated reinstatement cost for work already done is provided for at that point.
  • Wear and tear to date. A repairing covenant creates a legal obligation that builds up as the premises deteriorate. HMRC itself notes at BIM46535 that a lessee under a repairing lease has a legal obligation to repair, so a provision for the expected cost of repairs needed at the reporting date can be appropriate.
  • Future deterioration. Damage that has not yet happened is not a past event. Paragraph 21.6 rules out obligations that depend on future conduct, so a tenant cannot provide on day one for the condition the premises will be in after ten more years of use.

How did the 2026 lease changes alter the accounting?

The Periodic Review 2024 amendments apply to accounting periods beginning on or after 1 January 2026 (paragraph 1.37). Under the revised Section 20, a lessee recognises a right of use asset and a lease liability at commencement (paragraph 20.45). Paragraph 20.47(d) includes in the cost of the right of use asset any amount recognised under Section 21 for dismantling and removing the asset, restoring the site or restoring the asset to the condition required by the lease. Paragraph 20.48 adds that the cost is capitalised when the obligation is incurred, which may be at commencement or later as a consequence of using the asset. The provision itself is still measured under Section 21.

Where the tenant owns the fit out, the reinstatement cost is part of the cost of that property, plant and equipment under paragraph 17.10(c). Either way, the cost reaches profit or loss through depreciation over the period of use rather than as a single charge. Costs not capitalised under these rules are expensed under paragraph 21.5.

A tenant that uses the short term or low value exemption in paragraph 20.6 has no right of use asset, so any dilapidations provision on that lease is expensed. See short term and low value lease exemptions and the FRS 102 changes from January 2026.

How should the provision be estimated?

Paragraph 21.7 requires the amount the tenant would rationally pay to settle the obligation, or transfer it, at the reporting date. For a single lease this is usually built from a surveyor’s assessment of the work needed for the obligations that exist now, considering whether the range of outcomes is skewed higher or lower than the most likely figure. Practical points:

  • The statutory cap. In England and Wales, section 18(1) of the Landlord and Tenant Act 1927 limits damages for breach of a repairing covenant to the amount by which the value of the landlord’s reversion is reduced, and no damages are recoverable for failing to leave premises in repair if they would be demolished or altered so as to make the repairs valueless. A settlement figure can therefore be well below the cost of the works.
  • Discounting. Where the time value of money is material, the provision is discounted at a pre tax rate, and the unwinding of the discount is a finance cost (paragraph 21.11).
  • Review. The estimate is updated at each reporting date. Changes go to profit or loss unless the provision was originally recognised as part of the cost of an asset.
  • Recoveries. A contribution expected from a subtenant or insurer is a separate asset only when virtually certain and is not netted against the provision (paragraph 21.9).

What does this look like in practice?

Illustration only. A company signs a ten year lease of an office and immediately installs partitions. The lease requires it to remove them and make good at the end. A surveyor estimates the reinstatement at £20,000 in today’s prices; to keep the numbers simple, discounting is ignored.

Item Treatment Amount
Reinstatement provision at commencement Provision created, added to the cost of the asset £20,000
Annual depreciation of that cost Charged over the ten year lease £2,000 a year
Wear and tear after three years Surveyor’s estimate of repairs needed at that date £4,500

The company records the repair element as the deterioration occurs, based on the condition at each reporting date, rather than providing for ten years of wear and tear in the first year. Each estimate is revisited at every year end under paragraph 21.11.

How are dilapidations treated for tax?

Tax follows the nature of the cost, not the accounting entry. HMRC’s guidance is:

  • dilapidations that are deferred repairs are deductible to the extent the cost would have been allowable had the repairs been done during the lease (BIM43260);
  • capital costs are not deductible, including rebuilding the premises, reinstating parts the lessee has demolished and demolishing structures the lessee has added (BIM43255);
  • a composition payment to the landlord in place of doing the works can be allowed to the extent it reflects deferred repairs, apportioned if necessary, and is deductible when brought into the accounts under GAAP, whether or not the landlord ever does the repairs (BIM43265).

Where restoration costs sit inside a right of use asset, HMRC’s Business Leasing Manual at BLM51010 says part of the depreciation may be capital and should be added back as it is charged, and that attempts to delay the add back until the costs are paid should be resisted. In HMRC’s example at BLM51015, half of a £5,000 restoration estimate is treated as capital, giving an add back of £250 a year over a ten year lease. General guidance is in capital or revenue expenditure.

What mistakes come up?

  • Recognising nothing until the landlord serves a schedule in the final year, although the obligation for alterations existed from the day they were installed.
  • Providing on day one for the whole end of lease condition, including deterioration that has not yet happened.
  • Using the cost of the works without considering the section 18 cap or the likely negotiated settlement.
  • Expensing reinstatement costs that paragraph 20.47(d) or 17.10(c) requires to be capitalised, or capitalising them on a lease taken under the short term exemption.
  • Claiming a tax deduction for the whole charge without separating capital reinstatement from deferred repairs.
  • Leaving out the Section 21 reconciliation and narrative, which small entities must now give under paragraph 1AC.31C.

Where a tenant has vacated premises and still pays rent, the question of an onerous contract or an impaired right of use asset also needs to be considered.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.