Widespread changes to the UK tax system introduced in the 2007 Budget will have major implications of up to £1.145bn for the commercial property industry in particular, according to Savills Capital Allowances Consultancy. The hotel sector will suffer the most from these changes, with operating costs in a new hotel increasing by between 5% and 10%.
The Chancellor announced in the budget in March a reduction of the main rate of UK corporation tax from 30% to 28% with the intention of making the tax regime in the UK more competitive in the global marketplace. However, this reduction will largely be financed by significant changes to the existing capital allowances regime, such as the phasing out of building related allowances and a purchaser ‘inheriting’ residual allowances not yet claimed, thus hitting businesses with substantial property related capital assets.
The implications for the hotel market are that these increases in operating costs, caused by phasing out of allowances, will mean that the viability of refurbishing or building new hotels is going to be challenged at a time when demand for new room capacity is at its highest with 2012 Olympics just round the corner.
“I recently met with one of the UK’s leading private hoteliers, who has developed more than £100m of hotel real estate over the past 10 years,” said Gerard Nolan, director of hotels at Savills. “ In his view the loss of hotel capital allowances will discourage rolling all his trading profits into new UK hotel development, and subsequently his future hotels will be overseas.”
According to the treasury, the changes to the existing capital allowances regime will raise £1.145bn in the 2008–09 tax year, which will more than compensate for the cost of reducing the rate of corporation tax levied on businesses by 2%, currently estimated at £1.015bn per annum.