UK Hotel Sector hit by Budget Changes | PKF Reports

The major reforms proposed for capital allowances in this year’s Budget came as a ‘bolt out of the blue’ for the hotel sector. From 2008/09 these changes could substantially reduce the reliefs available to Hotels.

If these proposed changes are included in the 2007 Finance Act (expected at the end of July), it is likely that they will drive up the cost of staying in Britain’s hotel rooms and hit the country’s tourism industry.

These tax changes will eat into hoteliers’ profits. Many will have to look at their profit and loss figures, and factor the loss of tax relief into the price they charge for hotel rooms. Essentially the additional cost will be passed on to their customers.

Proposed changes to industrial and agricultural buildings allowances (IBAs)

It was announced in the Budget that IBAs are to be abolished by 2010/11, with allowances being phased out from 2008/09 onwards (see table below). It seems that the tax savings are needed by the Treasury to fund the 2% reduction in the main rate of corporation tax that takes effect from April 2008, but the hotel industry are ‘up in arms’ that they are expected to subsidise this.

Transitional rules:

To prevent businesses manipulating transactions to accelerate relief before 2010/11, balancing adjustments or recalculations of allowances on the sale of an asset or other balancing event were abolished for any event occurring on or after 21 March 2007. However, where the adjustment arose as a result of an unconditional contract which was agreed and signed before 21 March 2007 (and not varied in a significant way thereafter), balancing adjustments are allowed.

Implications:

The phasing out of IBAs will trigger an immediate reduction in the second-hand value of some hotels as purchasers consider the impact of the reduction in allowances available on the overall cost of using the hotel over their intended period of ownership. The decision could have a particularly marked impact in the hotel sector where the capital value of buildings is particularly high relative to earnings. As well as seeing a drop in hotel values, there will clearly be an impact on the hotel owner’s profits as this relief is phased out.

Hoteliers currently undergoing new build or extension plans will have to revisit these due to the loss of the tax reliefs that would otherwise been expected over the next 25 years. For example a hotelier building a new hotel for £20 million will have an increase in tax of nearly £2 million over the next ten years as a result of these changes.

Many hotels on which these allowances are claimed will have appreciated in value and will be worth more than their written down value for tax purposes. The sale of such hotel assets will now not trigger a balancing charge to claw back allowances already claimed although there will, of course, be tax to pay if capital gains are realised.

Anyone acquiring a second hand hotel after 20 March 2007 will be able to claim IBAs until they are phased out but the amount of expenditure on which they are claimed is restricted to the tax written down value of the building to the previous owner prior to the sale. A statutorily defined percentage of this amount may then be claimed as IBAs up to 2010/11.

Prior to the proposed changes, many hoteliers entered into ‘sale & leaseback’ transactions to dispose of their hotel assets and lease them back to concentrate on their operational activities (e.g. MacDonald Hotels, WA Shearings etc). The phasing out of the tax reliefs makes hotel acquisitions less attractive to organisations looking to invest in such assets and therefore many may not proceed as a result.

Proposed changes to plant and machinery capital allowances:

From 2008/09, there will be changes in the rate of important capital allowances as follows:

• the general pool allowance on plant and machinery reduces from 25% to 20% but the first £50,000 of new expenditure may qualify for 100% first year allowances (this will apply to the first £50,000 invested by a group but will not apply to motor vehicles)
• capital allowances for certain fixtures integral to buildings will reduce from 25% to 10% (the items that are to be covered by this new rule will be the subject of a consultation document to be published by HMRC)
• capital allowances for long life assets will increase from 6% to 10% bringing them in line with the rate for fixtures integral to buildings
• 100% first-year capital allowances for approved energy and water efficient plant and machinery will remain.

The Budget papers also refer to a “payable tax credit” or “enhanced capital allowance” for capital expenditure on ‘green technologies’ or environmentally beneficial investments. Although the language is far from clear and there is currently no information on what items will be covered or how the credit / allowance will work, the Chancellor suggested that this is to be worth £40 million a year to UK businesses. HMRC expects to issue consultation papers on all the outstanding details in the summer.

Implications:

The effect of the plant and machinery reductions will be considerable, especially in relation to hotels undergoing large refurbishment or new build programs.

The increases in certain allowances are likely to have only marginal importance to hoteliers.

With a fall in the rate of allowances on the general pool, it may become more important for hoteliers to consider whether a short life asset election is appropriate as this can act to increase allowances in the first years after purchase. Whilst no details have yet been published, it is likely that the argument over whether or not a capital item is a “fixture integral to a building” will become the new battleground with HMRC. Mobile plant and machinery, rather than installed items, may become more attractive.

Conclusion:

The Hotel Sector seems to have been hit severely by the proposed reform of capital allowances. These reforms will have a negative impact on the profits of many hoteliers and the capital values of their hotel assets. We are aware however, that hotel representative bodies and trade organisations such as BAHA have indicated that they will not stand idly by and accept these changes without protest.

For further information please contact Marios Gregori, Tax Director on 020 7065 0475 or [email protected]