Calculating tax relief
Case study
Central English Hotels is an expanding group of four-star business hotels operating six units in the Midlands. It has grown by acquiring underperforming units in key locations, upgrading and extending them, and then investing heavily in marketing.
Profits are high, but in spite of continuing investment in capital expenditure, the company is paying heavy taxes. Last year's tax bill was £200,000 and it is shortly due to pay £250,000 for this year.
Prompted by a recent magazine article, Central is examining whether it has claimed all the tax benefits to which it is entitled on its capital expenditure - and what it can do if it hasn't.
The review is focused on the most recent acquisition in Birmingham in late 1997. This was a 45-bedroom, full-service hotel that cost £1.35m. The company agreed a split of the price with the seller of £1.1m for land and buildings, £150,000 for goodwill and £100,000 for contents. There was no great debate in arriving at this split.
A 25-bedroom extension was added and the public areas upgraded at a cost of £700,000, plus £80,000 for furnishings.
Central's auditors have confirmed that the only tax relief the company claimed was for capital allowances on the contents and the new furnishings. The auditors calculated this had saved the company tax of £14,000 for 1998 and £10,000 for 1999. Central's board felt this was very low, particularly as nothing had been claimed on the plant and machinery that was part of the building. That includes elements of the heating, plumbing, electrical, lighting and telecom systems, as well as joinery and other ancillary building work on the extension, and upgrade work.
To examine this further, they dug out the purchase contract and inventory of contents, the title deeds and the breakdown of final building costs. n
This case study is a work of fiction and consequently the names, characters and incidents portrayed in the article are fictitious. Any resemblance to actual persons, living or dead, events or localities is entirely coincidental.
