Capital ideas for tax

As the hotel industry emerges from recession, there is a chance that many hard-learnt lessons may be forgotten. One lesson learnt by all building owners, including hotel owners, was the need to make their property sweat.

Efficient use of every building became paramount. Taxation was a key area where such efficiencies could be brought to bear - particularly in capital allowances.

Today, capital allowances are still a valuable element of efficient building usage and investment.

Plant and machinery

All too often, hoteliers consider capital allowances to be unimportant, since they already claim hotel allowances on their property at 4% per annum. This writes the whole property off against profits in 25 years. However, dig deeper and you will find that plant and machinery allowances are available at 25% per annum (on a reducing balance basis). This produces an after-tax cash saving of 21% in the first year and over 50% within five years on those elements claimed. A saving of this kind on a hotel will be significant.

Plant and machinery allowances affect all areas of property investment in hotels. Whether buying, building or altering a hotel, there will always be a plant and machinery position to consider.

So why doesn't everyone claim these allowances? The answer is simple: they are difficult to identify and value.

A successful claim relies on a knowledge of the law, both statute and past cases. In addition, valuation issues, addressed in preparing the claim, require certain technical building expertise. In each situation, different factors will affect the tax payer's ability to maximise the claim.

Statute and case law

Inland Revenue representatives will always debate "what exactly is plant and machinery" on every claim.

While air conditioning, heating, furniture and fittings are nearly always accepted as plant, there are "grey" areas such as parts of the electrical insulation, ambient features, preliminaries and fees that will nearly always be challenged. A fully maximised claim should, therefore, comprise all items that the tax payer can support using both statute and case law.

Valuation

Valuation issues will start to affect a claim as early as when the various types of investment opportunities are explored. For example, when purchasing a property the plant and machinery claimed may reflect the purchase price paid. Alternatively, for property purchased after 24 July 1996, entitlement to allowances could reflect past claims or potential claims made by others.

Even if the vendor has not claimed, the purchaser may be bound by the disposal value of a previous owner. Therefore, due regard needs to be given to the age of the plant and its valuation. A purchase from a non-tax payer can still give rise to just apportionment claim based on the price paid.

New build

It is particularly important in new-build situations to plan ahead and prepare supporting documentation early in the project to back up the "grey" areas at a later date. The debate over what is and isn't plant crystallises the importance of tax planning, which can result in up to 20% additional plant being claimed.

Refurbishments

When tax planning for alterations or refurbishment works, it is essential to take advantage of the Capital Allowances Act section 66. This clause states that in alteration work, items that are incidental to the installation of plant can also be plant themselves. For example, if a wall is demolished purely to facilitate the installation of plant, the demolition and reconstruction of the wall will also quality as plant.

Also be aware that when altering or refurbishing a building, there may be an opportunity to claim revenue allowances. The costs of repairs and maintenance can be written off at 100% in the first year - four times the first year saving on plant and machinery. Such items need to be identified in detail since they will be queried by an Inspector of Taxes.

Clearly, the hotel industry should be taking a pro-active approach toward capital allowances. If treated correctly, capital allowances can improve investment yields and reduce tax liability on property. A prerequisite of any successful claim is the accurate identification, valuation, and assessment of capital allowable items as early as possible.

Peter Kelland is a partner with property tax consultants Crosher & James and can be contacted on 0171-836 1221.

NEXT WEEK: Successful tax claims