Hotels are abundant in qualifying items of plant and machinery (P&M) and repairs. In the vast majority of cases, the total allowances are not fully identified by either the in house accountants or external advisors.
Why does this happen?
Hotels, in comparison to other commercial properties, have specific trade related plant that are not easily identifiable to a conventional accountant or tax adviser. It requires a specialist to segregate and value these items.
For example many new hotels are built using design and build contracts. In this scenario the costs provided to the client are usually “one liner” high level amounts such as description ‘finishes’. Without specialist surveying and valuation skills, it becomes difficult for an accountant to break down these costs and allocate the correct amount to plant and machinery allowances (PMA) and repairs.
For example finishes may include carpets qualifying as well as tiling which predominantly does not qualify. It may also include some specialist finishes which do qualify such as ambience. It is therefore necessary to engage a specialist who has the expertise to fully segregate costs.
Typical P&M within Commercial Properties
Some examples of qualifying P&M that are found in hotels include lifts, heating and cooling systems, sanitary fittings and hot and cold water installations.
Unusual P&M within Hotels
There are further qualifying items of P&M that are predominantly found within hotels. Significant additional allowances can be obtained. Examples include:
- Trade drainage
- Associated costs such as excavation for installation of swimming pools, including finishes such as tiling
- CAA 2001 s.25 incidental costs such as works to lift shaft within existing buildings
- Acoustic insulation including thermal insulation where provided
- Builders work in connection with mechanical and electrical installations
- Machinery to automatic entrance doors
Where a hotel is refurbished, expenditure on redecoration and roof repairs is often not nicely segregated. A specialist can carefully segregate to exclude improvement expenditure. For a hotel refurbishment there could be 30% or more expenditure that qualify as repairs. It is important for repairs to consider the accounting treatment at an early stage.
Along with the above categories, hotels may have qualifying items that create ambience.
There is no defined list that states what ‘ambience’ qualifies as P&M. Many items have become allowable through case law and are trade specific. IRC v Scottish & Newcastle Breweries Ltd (1982) 55 TC 252 was a significant case to consider ambience. The taxpayer was able to claim allowances on decorative assets such as wall plaques, sculptures and tapestries. They were not merely part of the setting but performed a valuable function.
Therefore where ambience is of importance to the trade, such as in hotels and restaurants, the definition of qualifying P&M is wider than an office building. Qualifying items may include:
- Decorative assets
- Specialist finishes
Hotel Capital Allowances Benchmarks
As shown there is great scope to identify additional allowances in hotels. It is reasonable to expect 20-40% of the purchase price of the hotel to be allocated to PMA, depending on the prior tax history. This will substantially increase if a refurbishment or fit out has been undertaken where 70-90% of total expenditure may qualify for PM and repairs.
It is recommended to use a specialist capital allowances firm to extract all the available allowances. Lovell Consulting can identify the hidden gems as well the slightly more unusual items of qualifying plant.
We can also add significant value where information is missing or difficult to obtain. As a dual qualified team in tax and surveying, we are able to break down costs and value qualifying items. This means that it is not necessary to have perfect information.