A corporate client of mine is ceasing to trade in the UK and making a substantial lump sum payment to its landlord for the surrender of the lease (in excess of £700K). This could generate useful tax refunds as I can take the terminal loss back for 3 years and reclaim substantial corporation taxes. However I am not sure whether the "Lump Sum" payment to the landlord can be included in the final trading loss. Can anyone help please ? I understand that if the original lease agreement had a clause allowing a surrender payment (exit clause), then part of the lump sum payment could qualify as Revenue deduction ( in accordance with formula (N-1) x 2% x Sum= Capital element, with N = remaning term of the lease). Is this correct ? Finally, would the fact that te tenant and landlord companies are under common control of an overseas resident person make any difference to the analysis ?
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Whilst you may be referring to s.221 CTA/09 when you say revenue deduction, I think the deduction will not be allowed. See BIM35625
Lease Termination Payments
Thank you for pointing me to the relevant tax legislation. The more I read it the more I become convinced that a part is Revenue Deductible. As in my case the remaining term is only 2 years (2 more years to expiry date), the formula ;- Capital Element = £700,000 x 2% x (2-1) = £14,000, i.e. £686,000 can be included in the terminal loss. I agree that the case laws mentioned in BIM 35625 do not help my case.
Perhaps you could vary the terms of the lease now (make the payment of the lump sum and claim deduction under s.221) and make it expire exactly the point when the company ceases to trade!! Rest of the months' payments will then be rent payments!