By taking advantage of the business renovation allowance, operators can halve the cost of renovating a qualifying building, explains Huw Witty
THE OPPORTUNITY It is possible to gain a Business Premises Renovation Allowance (BPRA) in respect of expenditure incurred in converting unused business premises into a hotel. It entitles the taxpayer to an initial allowance equal to 100% of any "qualifying expenditure".
As the current top rate of tax is 50%, then this route may enable a taxpayer to shelter income which would otherwise have been taxable at this rate and, as such, HMRC is effectively offering to pay half of the cost of renovating a qualifying building.
THE LAW BPRA is available in respect of expenditure incurred in converting the qualifying building into qualifying business premises. Conversion expenditure does not include expenditure incurred on acquiring the building to be converted, extending the building or any development on adjoining land.
Basically, if the building is to be a qualifying building, it must have been used for the purposes of a trade, profession or vocation or as offices, but such use must have ceased and the building remained empty for a period of at least one year immediately prior to conversion.
The building must also be situated in a disadvantaged area to qualify. The designation of disadvantaged areas is generous; large parts of England and Wales and Scotland qualify as disadvantaged areas including parts of Newcastle, Greater Manchester, Birmingham and Liverpool.
Qualifying business premises are those which are used or, importantly, let for qualifying purposes. A use for a qualifying purpose, which is similar to the use required for a building to be a qualifying building, is use for the purpose of a trade, profession or vocation or otherwise use as an office.
Carrying on a hotel business constitutes trading and so the use of a converted building as a hotel will constitute use for a qualifying purpose. Hence, expenditure incurred on converting a disused office into a hotel will qualify for the relief.
However, beware, the relief will be denied if the building was last used before renovation as a dwelling, or once renovated it is used as a dwelling.
Further, the relief was introduced on 11 April 2007 for a period of five years and so expenditure must be incurred on or before 10 April 2012 to qualify for relief. In this context the clock is already ticking. If a building is vacated now, the conversion cannot begin for a year - to satisfy the one year unused condition - which does not leave much time for the expenditure to be incurred.
PRACTICAL USE OF THE RELIEF If once the conversion is completed the hotel is let by the taxpayer to a hotel operator, BPRA will be treated as arising from a property rental business. As such it would be capable of being set against income arising from the converted building but if, as is likely, the BPRA exceeds that income it will be capable of being offset against other income the taxpayer may have in that tax year. Hence, where the taxpayer would otherwise be taxable at the top rate of 50%, the entire amount is available in tax relief.
EXAMPLE An operator buys a disused building for £30 in a disadvantaged area. He then incurs £70 renovating the building so that it may function as a hotel.
Of his £100 expenditure £70 may qualify for BPRA. The hotelier incurs this expenditure in the tax year 2010-11. (He will be entitled to claim BPRA in anticipation of the qualifying use of the building; if subsequently the building is not first used for a qualifying purpose then BPRA would be withdrawn).
In 2010-11 the operator will not, however, earn income from the building but will have a loss for his property letting business of £70 comprising the BPRA. He will be able to offset this against his income for the year 2010-11. Hence, assuming £70 or more of his income suffers tax at the 50% tax rate, the relief generated from his expenditure would be £35.
Huw Witty is a partner at Fladgate