Restaurant, Hotel and Pub Refurbishments and Tax
Summary of Key Points
- The tax treatment of certain types of spend varies from 0% to 100% allowable.
- A good plan drawn up early and shared with your accountant is likely to save you tax.
- Plant claiming rates range from 6% to 100% and are constantly changing with each new Budget.
- The definition of plant is very complex – hence the need for early tax advice before a single contract is let.
- For capital spend between 1 April 2021 and 31 March 2023 there is a 130% rate instead of 100%.
Restaurants, pubs and hotels must keep their properties fresh and up to date to retain and grow trade. With good planning, some of this refurbishment outlay can be offset by a reduced tax bill. This note sets out the main issues to consider.
Three Possible Treatments
In tax law a refurbishment programme can give rise to three different types of expenditure, with different tax treatments:
- Repairs and renewals spend is seen as a revenue expense and can be claimed 100% through the profit and loss account in the year it is incurred.
- Spend on land and buildings is seen as capital – 0% claim in the year of spend – and will only reduce the capital gains tax bill on the eventual sale of the assets.
- Spend on “plant” is a complex area of tax treatment with regular Budget changes. Rates vary from 6% to 100% depending on the nature of the expenditure.
A Good Plan
A business which draws up a good plan of proposed expenditure and shares this plan with its accountant is likely to see a reduced tax bill as a result. There will be two categories of expenditure identified:
- Spend which clearly fits into one of the three areas set out in Section 3 above.
- Spend which is potentially a “grey area”. With careful work throughout the project the potential tax relief on these items can be maximised.
For example, a hotel embarks on a major refurbishment programme which includes repairs and renewals to its car park. If HMRC accept this treatment the 100% tax relief is immediate. However, if HMRC successfully argues that this element amounted to the construction of new, greatly enhanced car park then it is capital – 0% relief in the year of spend, tax relief will only arise on sale of the car park.
Once the taxpayer is aware of this risk, he or she can act accordingly, for example:
- The contract with the supplier will be for “car park refurbishment and repair” and not “construction”.
- Care can be taken to ensure the final car park looks like a refurbished one and not a completely different, enhanced car park.
Plant Claiming Rates
Understanding the rates is a lot simpler than understanding the definition of plant. Even so, there have been many changes in recent Budgets and it’s a safe bet this will continue in future Budgets.
- Spend on qualifying energy saving (for example efficient boilers) and water saving plant – 100%. There is a website – www.eca.gov.uk – which lists the items which qualify.
- Rates on cars constantly change every budget but in general the lower the CO2 emissions the better,
- Spend on “integral features” – see below – and thermal insulation for the building – 6%.
- Standard writing down allowance for other plant – 18%.
- Structures and buildings - 3%
- Annual investment allowance per business for standard plant – £1m for 2022-23.
The last item makes it clear why HMRC are so keen to review major items of plant in detail. A business which spends £50,000 on new plant can claim all £50,000 as a business expense in that tax year. However, if HMRC challenge this and it proves to be capital, the business can claim at most 3% as an expense until the building concerned is sold.
The following aspects of buildings are integral features:
- Electrical systems (including lighting systems);
- Cold water systems;
- Space or water heating systems, powered systems of ventilation, air cooling or air purification, and any floor or ceiling comprised in such systems;
- Lifts, escalators, and moving walkways;
- Eexternal solar shading; and
- Active facades.
Most hotels, restaurants and pubs by their nature will have a significant level of these. Typically 25% to 30% of the cost of such a property qualifies as integral features. This is one of the highest % levels for any sector, and has meant that claims for capital allowances on this aspect of the buildings are often missed.
This is the trickiest aspect to understand, the reason being that no laws have set down exactly what plant is. Instead, the definition of plant has evolved case by case over the last 100 or so years as countless taxpayers have had their claims to tax allowances challenged by the tax authorities. So to make the best possible use of tax allowances, the following approach is suggested:
- Draw up a detailed schedule of all assets being purchased and what they are for.
- Share this with your accountant.
- For “grey area” items of plant, your accountant can then advise on tax cases on that type of item and the aspects of those cases which led to the Courts finding items to be plant and not capital.
- You then should follow this advice as much as possible in the way you let contracts and install the plant in your premises.
There are no guarantees in this area of tax law, and certainly the “law of common sense” does not apply. But a well planned and thought through programme gives any taxpayer the best possible chance of maximising their allowances claim. The first attempt to define plant in Court was in 1887:
“Plant includes whatever apparatus is used by a businessman for carrying on his business – not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in the business.”
This definition excludes business premises – as they are what you carry on your business in. So in principle plant is the apparatus you carry on trade with, and not in. Another Court decision gave us the “functional test” of the following 3 questions:
- Is it trading stock? - NO
- Is it the business premises? - NO
- Is it being used for carrying on the business? - YES
If only life was so simple! Rather than extend this paper for several pages to discuss whether partitions in a building are plant or capital, and so on, this paper is going to conclude with the following advice:
- In theory the definition of “plant” is straightforward.
- Cases over the years, however, have made it clear that it’s a very complex area of tax law.
- So consult your accountant early on in a major spend programme and give yourself the best possible chance of claiming everything you are entitled to!
130% "Super Deduction" 1 April 2021 to 31 March 2023
Most qualifying plant items will be able to claim 130% instead of 100% allowances. In practical terms, this means ensuring as much as possible is classifed as plant and not repairs.