Restaurant owners are often overlooking substantial tax allowances. This happens because their accountants and tax advisors may only pick up simple & obvious plant and machinery (P&M) items, i.e. chairs, tables, crockery etc. When fitting out or refurbishing a restaurant, the construction expenditure is generally not very well detailed for capital allowances, therefore not easily recognised by the accountants and tax advisors. The construction costs may just be a high level summary, where a non specialist may not have the expertise to fully segregate these costs and thus lose the allowances.
The construction costs are typically comprised of qualifying P&M such as heating and cooling systems, electrical services, sanitary fittings, food hoist, hot and cold water services etc. However, descriptions such as ‘finishes’ may include eligible items, carpet and some specialist ambient finishes, as well as ineligible items such as tiling. Surveying and valuation skills are required to split these costs adequately to plant and machinery allowances (PMA) and repairs. In addition, there are further less obvious qualifying items of P&M found primarily within a restaurant, which includes:
- Trade drainage – see JD Wetherspoon PLC
- Builders work in connection with mechanical and electrical services
- Acoustic and thermal insulation within existing buildings where provided
- CAA 2001 s.25 incidental costs such as works to lift and food hoist shafts within existing buildings
- Ambient expenditures
Expenditure to create Ambience
Furthermore, restaurants will have qualifying items of P&M 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. It can often be a complicated exercise as the tax case law in this area is still developing. Therefore it is necessary to engage a specialist to identify and maximise the PMA claims. Qualifying items may include:
- Decorative assets
- Specialist finishes
Enhanced capital allowances (ECA)
There may be scope for 100% allowances for green plant such as lighting and air conditioning, electric hand dryers and water efficient toilets. The ECA Scheme lets businesses that invest in certain energy-saving equipment specified on the Energy Technology List (ETL) write off the full cost of the compliant equipment against their taxable profit in the first year, thus providing 100% tax relief. These would otherwise attract the lowest writing down allowance at 8%.
Where a restaurant is refurbished, some repairs expenditure such as wall cleaning, redecoration and floor repairs is not very well detailed and is consequently overlooked. There could be 10% to 30% expenditure that qualifies as repairs. It is essential to consider the accounting treatment for repairs at an early stage.
There could be scope to allocate a proportion of the premium paid to capital allowances for the acquisition of the short or long leasehold interest. When assigning leases, it is essential to engage a specialist to get early capital allowances advice and adequate wording at the Head of Terms/offer letter stage. If you can get agreed wording in early, there is less ambiguity for the lawyers to argue about later on with the agreement to lease.
There could be scope to allocate a proportion of the landlord contribution tax efficiently. As mentioned above, getting early specialist advice and wording for inclusion in the contract to protect your capital allowances position is essential.
We are generally able to significantly increase the allowances, when we are involved at an early stage and carry out detailed cost assessments. For fit out or refurbishment works, up to 90% of the expenditure could attract allowances.
For restaurant chains it is unlikely that full allowances will have been claimed. It is possible to review all historical expenditure and make a full increased capital allowances claim in a current tax return.
It is important to obtain specialist capital allowances advice before opportunities are missed. Lovell Consulting have a highly skilled and expert team, dual qualified in surveying and tax. Therefore we have the expertise to identify the unusual items of qualifying P&M, as well as segregate the high level construction costs into qualifying P&M items.