Problem: "I am the MD of a company running a chain of hotels, which is looking to expand. However, I have heard that businesses in the hotel industry are about to be hit by increased tax liabilities. How is this going to affect my company, and its tax bill, in the future?" - Anonymous
Solution: There are many changes about to kick in that are likely to affect the level of tax relief available to businesses in the hospitality sector. With a plan in place for capital expenditure, there is no reason that businesses such as you cannot mitigate the effects of these changes.
The major feature is that with effect from April 2011, the Hotel Allowance (HA) – whereby capital allowances of 4 per cent per annum were available on the full cost of the hotel – will be abolished. Not only that, with effect from April 2012, writing down allowances on capital expenditure will fall from 20 per cent to 18 per cent on general plant and machinery expenditure and from 10 per cent to 8 per cent on certain types of plant and machinery expenditure e.g. integral features such as lifts, air-con etc.
These changes are likely to result in a greater exposure to tax for businesses in the hotel industry.
Tax saving options
There is great emphasis at the moment on “green” assets, with generous tax breaks available. A deduction of 100 per cent is available on expenditure on such assets. Therefore, we recommend you consider equipping your hotels with such features as energy-efficient heating and lighting and water-saving taps and toilets.
An alternative to HA’s is the Business Premises Renovation Allowance (BPRA). This is available for expenditure on converting or renovating unused business premises in a disadvantaged area. The allowance is for 100 per cent of the cost, and is therefore a much more favourable incentive than HA’s. The term “disadvantaged area” should not deter you, as areas all over the UK qualify, including parts of London and the South East. This is set to expire in April 2012, so expenditure should be incurred prior to this.
One area that can be exploited to your advantage is the use of the Annual Investment Allowance (AIA). This gives businesses, regardless or their size or legal form, full relief on expenditure on almost all plant and machinery (not cars), and the maximum limit was extended to £100,000 as from April 2010. However, it is set to be reduced to £25,000 from April 2012, giving businesses a two year window of opportunity.
As an example, take a business with a 31 December year end. Between now and the end of 2011, capital expenditure of up to £187,500 will be fully deductible for tax purposes (provided £87,500 is spent before the end of 2010 and £100,000 during 2011). Although the legislation is yet to be finalised, it is likely that a further £25,000 of expenditure will be allowable from 1 January 2012 to 31 March 2012.
This allows businesses to reduce their taxable profits by £212,500 over three accounting periods. Therefore, planning the timing of capital expenditure during the next 18 months is key to maximising tax savings.
I would strongly recommend that professional advice is taken from a reputable tax and business specialist to establish the optimal acquisition strategy for an expanding company such as yourselves.
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