New tax incentives for hotel owners and operators

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In his Spring Budget, the Chancellor of the Exchequer Jeremy Hunt introduced so-called ‘full expensing’ for the investment of qualifying expenditure on new plant and machinery equipment. This was a huge boost for companies seeking to invest in new information technology (IT) or plant and machinery equipment, but is particularly helpful for the hotel sector.

The measure is set to be in place for three years with the intention of making it a permanent feature of the capital allowances investment incentives regime when government finances will allow. It means that 100% of the cost of developing or refurbishing a hotel or hospitality facility now, potentially, attracts tax relief against the taxable profits of owners or operators of hotels. This effectively wipes out the tax on marginal investments because the tax relief from capital allowances (the cost of the qualifying investment multiplied by the tax rate) immediately offsets the tax on profits equivalent to the amount of the investment in the qualifying asset (profit times the tax rate).

What is full expensing?

Currently, hotel investors and operators can claim capital allowances for the expenditure that they incur on items of ‘plant and machinery’. This allows companies and non-incorporated businesses to claim a proportion of tax relief each year to reduce their tax liabilities and retain cash to reinvest in the business.

Although the Chancellor predicted that only 10% of companies would be subject to the new 25% Corporation Tax rate, a significant number of companies with profits between £50,000 and £250,000 will pay an increased rate of between 19% and 25%. The new full expensing measure will be a welcomed reform that will allow companies investing in qualifying items to immediately claim 100% of the expenditure incurred and lower their taxable profits which the higher rates of Corporation Tax will apply to. The new rules should simplify the process and give more certainty to businesses seeking to make investment decisions around the availability of the tax relief.

Details of the measure:

  • 100% full expensing is only available to companies who incur expenditure on new so-called ‘Main Pool’ plant and machinery. Expenditure must be incurred after 1 April 2023 and before 1 April 2026.
  • For ‘Special Rate’ expenditure which doesn’t qualify for full expensing, a 50% first-year allowance (FYA) can be claimed instead, subject to the same conditions that apply for full expensing. This means that a company can claim a deduction from taxable profits that is equal to half of their qualifying expenditure in the year that the money is spent.
  • The 50% FYA is available for expenditure by companies on new special rate assets (including long-life assets with a reasonably expected economic life of 25 years or more) until 31 March 2026.
  • The enhanced rates are only available to corporates. Unincorporated businesses can claim the £1m Annual Investment Allowance (AIA) and plant and machinery writing-down allowances (WDAs) that currently exist.
  • Plant and machinery must be unused and does not apply to cars, assets given to the company as gifts, or bought to lease to someone else.
  • Expenditure on second-hand assets doesn’t attract full expensing but can still qualify for the AIA.
  • Capital allowances can be claimed on the balance of special rate expenditure in subsequent accounting periods at the 6% rate of WDAs for special rate expenditure.

What does it mean for hotel owners and operators?

The post-tax cost of leasing a hotel as an investor or operating a hotel as an operator is now more tax efficient than ever because of the level of tax allowances the costs attract, and the rate at which those tax allowances are given.

A typical new-build hotel investment will attract the following types of tax allowances:

  • Main pool P&M* (25% to 35%)

  • Special rate P&M (30% to 40%)

  • SBAs** (40% to 60%)

* P&M = Plant & Machinery
** SBA = Structures & Buildings Allowance

How is the tax relief given?

On a new hotel costing £10m to construct, the tax allowances and relief is given on the following basis against taxable profits of owning or operating the hotel.

Year P&M* Main P&M Special SBA** Allowance
in year
Value of tax relief
  £1,300,000 £2,700,000 £6,000,000   @25% Corporation Tax Rate
1 £1,300,000 £1,350,000 £180,000 £2,830,000 £707,500
2   £81,000 £180,000 £261,000 £65,250
3   £76,140 £180,000 £256,140 £64,035
4   £71,572 £180,000 £251,572 £62,893
5   £67,277 £180,000 £247,277 £61,819
6   £63,241 £180,000 £247,277 £60,810
7   £59,446 £180,000 £239,446 £59,862
8   £55,879 £180,000 £235,879 £58,970
9   £52,527 £180,000 £232,527 £58,132
10   £49,375 £180,000 £229,375 £57,344

NB: This is an illustrative example only. Tax relief continues to be given beyond year 10.

* P&M = Plant & Machinery
** SBA = Structures & Buildings Allowance

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