‘Capital Appreciation’ – The Resurgence of Allowances

One significant development in the UK tax landscape doesn’t come as a result of the Spring Budget, but as a result of amendments to rules relating to the restriction of corporate interest deductions.

Traditionally, it has been possible to leverage businesses in the UK with high levels of debt, on the basis that interest costs for the debt have generally been deductible against profits of the business. As a result of the OECD’s work on the “Base Erosion and Profit Shifting” initiative, the UK is introducing rules limiting the amount of interest which can be deducted going forward. The rules are extensive and labyrinthine, but the net result of the changes will be that many larger corporate groups will get lower tax deductions for interest costs, and therefore have higher profits subject to UK tax.

There may be other ways to shelter profits from tax – one key example being the use of capital allowances. Effectively a tax equivalent of depreciation, capital allowances can allow a taxpayer to reduce its profits subject to UK tax. This could be a deduction of up to 100% of the capital expenditure (in relation to enhanced allowances for energy efficient capital outlay), but more likely either 8% or 18% for ‘standard’ fixtures.

It may therefore be the case that, as the tax benefits of debt leveraging reduce for larger hotel and leisure companies, the benefit of capital allowances increases proportionately. In fact, the hospitality sector is one of the prime areas where capital allowances will be of increased importance, due to the fact that properties such as hotels will usually consist of a higher proportion of qualifying capital expenditure (potentially covering costs for such things as acoustic insulation, ambient lighting, and possibly even artwork and decorative assets). Whilst it will obviously differ on a site-by-site basis, some capital allowances experts have estimated that the cost of hotel developments can consist of up to 65% qualifying expenditure – compare this to a student accommodation development, where the estimated qualifying expenditure is up to around 15% and it is clear to see that allowances may play a bigger part in project

The article was originally published in the hospitality bulletin 'CHECK-IN with AG', produced by law firm Addleshaw Goddard's Hotels & Leisure team.

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