Considering investing in a hotel business? Make tax allowances work for you
Hoteliers can save substantial cash sums by making the most of tax breaks available through the capital allowance regime – but it is subject to imminent changes and early action is recommended.
Annual investment allowance
The Annual Investment Allowance (AIA) allows 100 per cent relief against profits for the first £100,000 spent in a year on plant, machinery and fixtures, except cars. In a hotel business this allowance covers fixtures such as bathroom suites, bedroom furniture and kitchen equipment.
This limit will be reduced from April 1, 2012 to £25,000, so the timing of expenditure is important.
A hotel company with a December 31 year-end may be planning to spend £90,000 on upgrading its kitchen equipment. Assuming it has not bought any other plant in the year, if it spends the full £90,000 before December 31, 2011, it will receive 100 per cent relief on £90,000. However, if it spends the £90,000 in January 2012, the 100 per cent annual investment allowance will only apply on costs of £43,647, leaving a balance of £46,353 which will only attract an allowance of 20 per cent.
Integral features allowance
Hotel allowances have been replaced by a new integral features allowance. Most of the items this applies to – such as lifts and escalators and water heating systems – are hidden in the fabric of the building and are easy to overlook, but can form a significant part of the cost of a new building. The allowance is currently 10 per cent of the cost of these features, but this will be cut to eight per cent from April 2012. If you have not used your annual investment allowance in full you can allocate costs on integral features to the AIA and get 100 per cent relief.
Fixtures in buildings
Often the sale contract of a hotel does not apportion property and fixtures in the purchase price. However, a procedure can be used to produce a fixtures figure for tax purposes. For instance, we have just undertaken a capital allowances review for a client in the hospitality sector who bought brand new premises. Out of a total cost of £900,000 we identified £260,000 of fixtures and integral features which will generate a tax saving of up to £54,600 over time.