Hotels, Leisure & Tourism

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1 Hotels, Leisure & Tourism Welcome to our new look newsletter. Inside stories: Tom Roach s thoughts on the year so far Annual investment allowance Stamp duty land tax increase Francis Clark joining the PKF network Supporting you and your business

2 A strange old year To use a footballing cliché 2016 has certainly been a game of two halves. In the West Country, we started the year well and truly in the doldrums with significant falls in guest numbers. Several commentators have put this down to the pre Brexit vote with people staying at home. It is difficult to see why this should be, as surely a couple of minutes in a voting booth isn t going to hinder holidays. However, there was undoubtedly a reluctance for people to visit the West Country for the first five months of the year. By May, our occupancy database showed a bewildering fall of just under 5%. To put this into perspective, we have typically noted swings of more than 2% as significant! The Brexit vote then occurred which has moved the exchange rate to levels not seen since the 1980 s. Coupled with the news that some of Southern Europe was perhaps best avoided, this has had a burgeoning effect on the occupancy rates in the South West. Whilst it has been argued that this is likely to impact more on future bookings, the trends in summer bookings were significant and from August through to October, occupancies fully recovered to levels not seen since The turnaround has been so significant that whilst we are still behind the record occupancies of last year, the overall annual average fall is less than the 2% level deemed to be significant above. Booking levels appear to be strong for the foreseeable future and whilst these tend to be far more anecdotal, the trend does appear to be positive. Sticking with comparison data, it is interesting to look back to pre-recession levels of occupancy. The comparison with ten years ago is certainly something that is worth noting. As indicated above, the summer period is now broadly on a par again with We had reported in articles three or four years ago about the worrying trend in the fall away of August bookings, but these have now largely recovered. Occupancies in the peak August period are now well above 80% with July not far behind. The most significant difference with the figures of ten years ago is what has happened with the off peak periods which the tourism associations have worked so hard to improve? The desire to make the region a year round destination is clearly something that is now possible, with some of the more resort type accommodation providers reporting significant levels of bookings all year round. In fact, this has translated to significantly better levels of occupancy throughout the South West with an increase of around 25% in occupancies between November and March. This is partly driven by the magnificent food offerings in the West Country. The pioneers in food and accommodation provision have largely forced a move towards excellence and innovation which means the food offering is as good, if not better than certainly anything else in the UK and often leaves your average Cornishman or Devonian frowning at the poor quality of the moules frites and tarte tatin whilst on holiday in France. Often overpriced, even before the fall in the value of the pound, this should surely add to the attraction of the family holiday in the West of England! Article written by Tom Roach, Head of Tourism for PKF Francis Clark.

3 Ratings reviewed The long awaited draft of the 2017 rating list went live on 30 September and follows the two year postponement from April Current rates bills remain based on pre-recession value from April 2008 and the economic downturn that followed. Vickery Holman are experts in all things property, and Nicola Murrish has commented recently that rateable values (RVs) are showing a mix of increases and decreases dependent on type and location of property. Vickery Holman s research to date shows that 70% of holiday parks in Cornwall have seen increases, with some as much as 60%. 90% of hotels have seen an increase in RV, as much as 50% in some cases. As seen in all previous revaluations, the Government has announced a transitional relief scheme which will phase in increases and decreases. It is important to remember that a lower RV doesn t necessarily mean a reduction in what you pay. Please contact us or Nicola Murrish at Vickery Holman for more information. nmurrish@vickeryholman.com Stamp duty land tax increase When considering whether to buy or sell a property, stamp duty land tax (SDLT) is something that needs careful consideration. The stamp duty paid on the purchase of shares is 0.5% compared with the rates of SDLT on commercial property, which are now 5% on the value over 250,000 and a further 2% on the value between 150k and 250k. This means that where possible, for SDLT purposes at least, purchasing a business through the purchase of shares can be more tax efficient than purchasing the assets of the business. Sometimes, however, this might not be possible or desirable, for example, if you are purchasing from a partnership or sole trader, or you may not wish to take on the company. The new commercial rates of SDLT have brought into sharper focus what can be deemed to be free goodwill and also loose plant and equipment which do not ordinarily attract SDLT. HMRC state that SDLT is paid on anything that forms part of the land or property. As well as the buildings and land, these assets can include: fixtures and fittings, including bathrooms and kitchens but not carpet, curtains or freestanding furniture. It also includes assets such as the value of goodwill attached to the land. The new rates of SDLT replace the stepped rates where a maximum of 4% was paid on property which cost more than 500,000. This means that the level of SDLT paid now is more than previously whenever the land and property is valued at more than 1,050,000. The area of goodwill is something that needs particular consideration. Case law has established that the major elements of goodwill attributed to, say, a hotel is normally deemed to be adherent to the property and therefore will be an asset that is liable to SDLT. If an argument could be made that goodwill is independent of the property, then it could potentially be free from SDLT. However, for purchases of things such as touring parks and hotels, case law suggests that this is not a particularly easy thing to agree with HMRC. As noted in the article on capital allowances, this means that the allocation of fixtures and fittings is particularly important to establish, not just for future capital allowance claims but also for minimising SDLT payable.

4 What s in a name? Many who read the hotel newsletters that PKF Francis Clark have been producing for over fifteen years, will have noted a slight change of our name. The PKF prefix has come about as we have now joined the PKF network. The world is becoming an ever smaller place, and an increasing number of clients are doing business internationally. Therefore, to be able to continue to provide them with our full support, we need to have strong international links across the globe. We have therefore decided to return to an international network that we were members of in the late 70s and early 80s, PKF. As you will have seen, as with most international networks, we have adopted a pre-fix of that network in our name. We remain an independent regional firm based in the South and South West, and as part of the PKF network we can potentially provide a wider spread of expertise should you, as clients, ever have queries about trading abroad or are seeking tax advice in another country.

5 Annual investment allowance: deferred tax trap Since the annual investment allowance (AIA) was introduced in 2008, there have been a number of changes in the amount of qualifying expenditure, with a maximum allowance of 500,000 applying during 2014 and However, this level was always described as temporary and with effect from 1 January 2016 the AIA has been reduced to 200,000. For clients who have taken advantage of the cashflow benefit offered by the AIA and invested the full eligible amount in qualifying business assets for the last few years, this reduction could create a headache as deferred tax liabilities begin to crystallise. A simplified example of how this could work for a business that invests up to the AIA threshold each year is as follows: (assume all expenditure is on assets that qualify for AIA and are depreciated over 4 years on a straight line basis) Year Capital expenditure up to AIA Depreciation in year Net impact on taxable profits Tax 20% Deferred tax liability carried forward 1 500, ,000 (375,000) 75,000 75, , ,000 (250,000) 50, , , , ,000 (20,000) 105, , , ,000 (30,000) 75, , ,000 75,000 (15,000) 60,000 In future years, the deferred tax liability carried on the balance sheet will remain unchanged as long as the AIA is not reduced further and the business continues to invest the full eligible amount. However, the remaining liability would fully or partially crystallise in the event of reducing future spend or disposing of assets. The problem may be particularly severe for sole traders who have not been required to recognise deferred tax in their accounts and as a result, may be taken by surprise by the cashflow impact of the additional tax charges.

6 Hotel disposals and acquisitions An important point to bear in mind is that capital allowances are often claimed in excess of depreciation charged in your accounts (particularly in relation to the favourable Annual Investment Allowance). Assuming that plant and machinery is valued for transactional purposes at its value within the accounts, the vendor will suffer a full reversal of the deferred tax liability in the year of disposal. Although the headline treatment is the same, where AIA has been claimed the deferred tax issue described previously means that larger than expected liabilities may become more common in future. A further complication arises where some of the plant and machinery is treated as fixtures of a building. In this situation, the vendor and purchaser are required to make a joint election to identify the part of the purchase price that relates to the fixtures for the purposes of capital allowances. This amount is used to calculate any balancing allowance or charge on disposal for the vendor, and to calculate the value on which the purchaser will be allowed to claim capital allowances. through future capital allowances, while a low elected price will be beneficial for the vendor but reduce the allowances available to the purchaser. Purchasers should be aware of the benefit of capital allowances on their tax position and impact of deferred tax in their accounts. This increases the importance of negotiating the value of allowances to be transferred as part of an acquisition, rather than assuming that there is a right price. A high elected price will increase the tax cost to the vendor but allow the purchaser to obtain more value We have offices in: EXETER NEW FOREST PLYMOUTH POOLE SALISBURY TAUNTON TORQUAY TRURO Please visit our website for your local office expert PKF-FRANCISCLARK.CO.UK If you would like to be added to, or deleted from our mailing list, please contact Peter Finnie, peter.finnie@pkf-francisclark.co.uk or sign up online at: PKF Francis Clark is a trading name of Francis Clark LLP. Francis Clark LLP is a limited liability partnership, registered in England and Wales with registered number OC The registered office is Sigma House, Oak View Close, Edginswell Park, Torquay TQ2 7FF where a list of members is available for inspection and at www. pkf-francisclark.co.uk The term Partner is used to refer to a member of Francis Clark LLP or to an employee or consultant with equivalent standing and qualification. Francis Clark LLP is a member firm of the PKF International Limited network of legally independent firms and does not accept responsibility or liability for the actions or inactions on the part of any other individual member firm or firms. This publication is produced by Francis Clark LLP for general information only and is not intended to constitute professional advice. Specific professional advice should be obtained before acting on any of the information contained herein. Whilst Francis Clark LLP is confident of the accuracy of the information in this publication (as at the date of publication), no duty of care is assumed to any direct or indirect recipient of this publication and no liability is accepted for any omission or inaccuracy.