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Brown's fiscal faux pas for hospitality
With an eye on his Government's popularity and the impending Scottish elections in May, Gordon Brown's Budget on 21st March was the usual 'subtle' combination of both handouts and takeaways for British industry. However, closer scrutiny of the small print reveals that it is the leisure and hospitality sector, and hotels in particular, that are the major losers this time around. Barry Laurie sheds some light on the dark side of the Budget…
The principal reason for the gloomy outlook is that capital allowances are being cut quite savagely, for all businesses. Such allowances have been around for decades and are a major incentive for capital investment in buildings and plant and machinery. They operate by reducing the taxable profits by a certain percentage of the capital spent each year, and hospitality businesses will feel the loss acutely.
Investment plans are often made well in advance, so to find these allowances severely cut with no prior warning is seriously damaging for hotels, and it is bound to hit investment hard both for small and large organisations.
To make matters worse, most companies will actually suffer an increase in their tax rate as this is going up from 19% to 22% over the next two years. A small hotel planning to add an extension at a cost of £1.5m and claiming all permitted allowances could end up paying £86,000 more tax over the next five years than they would have done under the old rules.
Even large companies, whose tax rates are going down from 30% to 28%, will suffer. An operator building a new hotel at a cost of £15m could be faced with an increase in tax of nearly £1m over the next five years because of the changes.
And the outlook is bleak for companies who invested long before these changes were announced, as the tax relief will be revoked on them as well. The hotel buildings allowances give tax relief of 4% pa over 25 years. For example, a company which invested three years ago will have only received relief on 12% to date, though it will have expected 25 years of tax relief when the investment decisions were made. For these operators, finding the Government has withdrawn most of the relief for the next 22 years will be a huge shock.
The only hope is that the hospitality sector fights back like they did with the Revenue & Customs over the tips and troncs fiasco. Given the industry's instinct for self-preservation and a fair deal, and the Treasury's memorable, if chequered, history of U-turns, my bet is that hospitality businesses will not stand idly by and accept these changes without strong and unequivocal protest.
If you feel aggrieved by these changes, you should make your concerns known to your trade association, your MP and MSP and the Government. I too would be very interested to hear from you.
Barry Laurie
HEAD OF TAX CONSULTANCY
McCabes
56 Palmerston Place
Edinburgh EH12 5AY
Email:barry@mccp.co.uk
This article has been edited from its original version. For the complete feature please see Catering in Scotland magazine May/June 2007.
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