ADVICE: Capital Allowances


Did you know that there is tax relief available for certain types of investments you might want to make in your hotel? MARK TIGHE, managing director of capital allowances specialist, Catax Solutions, explains.

The enduring image of the Great British hotel is of a warm and welcoming home-from-home where you can enjoy a great night’s sleep and make the most of the superb facilities that are on offer. With this in mind, the idea of turning one upside down and shaking it vigorously will seem a little odd.

But this image – of a hotel held aloft with guests, receptionists, beds, crockery sets and Nespresso machines falling out – is useful in helping explain what capital allowances are.

Intrinsic fabrication

Essentially, everything that wouldn’t fall out of a hotel if you turned it upside down and shook it — what’s referred to as the building’s ‘intrinsic fabrication’ — is what you can claim capital allowances tax relief against.

We’re talking about things such as lighting, heating, air conditioning, water disposal, fire alarm and drainage systems, electricity cabling and other ‘embedded’ features like security installations and ventilation.

All of these can produce a huge tax windfall of thousands or even tens of thousands of pounds for hotel owners. In fact, in our experience, nine in 10 hotels will be due a tax windfall, with the average amount of unclaimed capital allowances found in hotels in the region of £185,000.

Tax windfall in Norfolk & Cambridgeshire

But it can be a lot more than that. For example, the owner of a hotel in Norfolk, instructed us recently to carry out a capital allowances audit. Having surveyed the property in detail, which they had purchased for just under £1,180,000, we discovered approximately £189,000 of unclaimed capital allowances in the intrinsic fabrication of their hotel, mostly within the foul water disposal and drainage installations, electrical installations and communication installations.

We were instructed by another hotel in Cambridgeshire last June to carry out an audit and subsequent analysis for any unclaimed capital allowances. The purchase price of the hotel was £1,100,000. After an intricate investigation, we identified at total claim of £207,500 for unclaimed capital allowances. The specific intrinsic fabrication in this case related to foul water disposal and heating installations.

The net tax benefit to the hotel owner in Norfolk (at their higher tax rate) was £75,600 (40% of £189,000). Similarly, the net tax benefit to the hotel owner in Cambridgeshire was £83,000 (40% of £207,500). This tax relief was given in the form of an initial lump sum payment and then ongoing tax relief against their corporation tax bill.

In both cases the money received was a significant proportion of the original purchase price of the hotel – 16% and 19% respectively – and has made a massive difference to their business.

Hotel owners in the dark

Unfortunately, because most accountants are unfamiliar with capital allowances and how to identify them, hotel owners themselves are usually in the dark about the potential sizeable tax rebate that comes from unclaimed capital allowances. This isn’t ideal as it’s a tax relief they have a right to claim under UK law.

Following new laws announced in the Finance Act 2012, it has become even more important for hotel owners to have capital allowances on their radars. The reason for this is that, since 2014, any unclaimed capital allowances must now be identified and documented before or at the point at which a hotel is bought or sold – or they will be lost forever.

Identifying capital allowances

So what’s the process of identifying unused capital allowances? Well, we start by establishing the capital allowances history of the property. Firstly, we look at the details of any prior claims made by the accountant. If we feel that unclaimed capital allowances exist then we will carry out an in-depth forensic survey – or audit – of the entire site.

We then produce a report detailing the reasons for making a capital allowances claim on items within the property along with a breakdown of the proposed claim amount. After that, we send the report to the client and their accountant along with guidance on how to submit the claim to HMRC in order to receive their tax benefit.

One final thing: it’s worth pointing out that most capital allowances firms, including ourselves, will only charge a fee if the capital allowances identified are substantial — at Catax Solutions, for example, we only charge a fee if the unclaimed capital allowances identified amount to over £50,000. This means that there is no risk and no up-front cost for hotel owner, which gives them immediate peace of mind.

Right not privilege

Ultimately, capital allowances are a right and not a privilege, and if hotel owners have incurred the expenditure or costs involved in buying, building or adjusting their building, then they deserve the tax benefit. And with average unclaimed capital allowances in the hotel industry soaring into six figures, who can afford not to look into it?

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