The rate of United Kingdom corporation tax paid on business profits will increase on April 1 from 19% to 25%, which will place an additional burden on hotels’ profit-and-loss accounts.
The 25% rate will be paid on profits of more than 250,000 pounds sterling ($301,000), with companies with profits of between 50,000 and 250,000 pounds sterling paying a sliding scale of between 19% and 25%.
U.K. Chancellor of the Exchequer Jeremy Hunt ratified the increase in the 2023 budget outlined on Wednesday.
The budget also saw the tax on alcohol rise in line with the rate of inflation, which is currently at 8.8%. But there will be new relief for alcohol sold in pubs, bars, restaurants and hotels, rather than from supermarkets and other retail outlets.
Hunt added hotels and other businesses can deduct investment in new machinery and technology as a route to lowering taxable profits.
But U.K. hoteliers think the government can do more. Lionel Benjamin, co-founder, AGO Hotels, said businesses including hotels still face high costs, which will just be passed on to guests.
“It was disappointing that [Hunt] did not reverse next month’s corporation-tax rise,” Benjamin said. "With double-digit inflation and rising bills, this means further costs for businesses, which we are trying not to pass onto the consumer, but it is becoming more difficult not to do so.
“In the coming months we may see more businesses close their doors,” he added.
Corporation taxes were higher in the U.K. in the mid- to late 1970s, occasionally higher than 50%, according to Dan Neidle, founder of nonprofit tax advisory Tax Policy Associates. He added the increases will put pressure on hoteliers.
Historically, the new rate is not the highest it has been, but the increase will hurt, he said.
“Nineteen percent is a low rate, but it was achieved by limiting reliefs and other expansions of the ‘base’ on which corporation tax is charged. The effective rate, that is, the overall impact of the tax on company profits, has changed surprisingly little over the last 50 years,” Neidle said.
“So, the increase to 25% is a big increase on historic corporation tax. It is likely to have an adverse impact on investment and, in the long term, very possibly on wages, because the economic burden, the ‘incidence’ of corporation tax, is shared by shareholders and employees. It certainly won’t benefit business.”
He added the percentage change would raise sizable money for the government’s coffers, in which its debt is hovering around 100% of gross domestic product, and if “it does not come from corporation tax, then from where?”
The big pushes from the U.K. hotel industry have been for a revamp and lowering of business rates — another tax — and the reduction of value-added tax from 20% to a level closer to that of competing countries on the European mainland, Benjamin said.
“We are calling for a reduction of output VAT to 10%, widening the scope of capital allowances offered to encourage development and environmental, social and governance investments and a comprehensive review and reduction of the widely outdated system of business rates. For the hospitality sector to thrive and survive, we need more,” Benjamin said.
Neidle said corporation tax rules are complicated, especially in determining whether a company is part of a conglomerate, which might result in profits being bundled together and amounting to a higher total that is taxed at a higher rate, or taxed at all.
What Hoteliers Can Do
Aubrey Calderwood, managing director of tax and debt advisory Gateley Capitus, said there are options for hoteliers and others to further reduce the burden, or at least restructure their accounting more sensibly.
“The increase is 31.57%, if you want to see what that burden is, but the question is, would you rather pay that money to Her Majesty’s Revenue & Customs or reinvest it in your hotels?” he said.
Calderwood added hotels are rich in assets qualifying for tax relief. His advice for hoteliers is to seek help to lower their exposure to tax.
“The government still has generous tax breaks to encourage investment and growth for new plant and equipment, environmental, social and governance considerations and research and development,” Calderwood said.
There are other initiatives that can reduce taxes such as Land Remediation Relief, which includes clearing asbestos, he said.
A current tax initiative Calderwood called the “Super Deduction” — which allowed businesses to deduct up to 130% of the cost from profits before tax — ends March 31.
He said the objective of hotel investors must be to claim maximum levels of capital allowances coming forward from any settlement.
“Assess the potential capital-allowance value. Be proactive,” Calderwood said. “Do not leave this until the end of the buying process. Ensure head of terms are correctly drafted, ensure the sales and purchase agreement gives effect to the intentions of the parties and be prepared to negotiate with the seller. Ask if they are taxpayers.”
Hoteliers must perform due diligence via the Commercial Property Standard Enquiries system into the capital allowance history of the property they intend to buy, he added.
If hoteliers intend to sell their properties, they should do all that a buyer would do but ensure the tax-allowance value for the maximum benefit be either retaining or transforming to the buyer, he said.
Calderwood added hoteliers can look back in time for potential tax savings.
“There is no limit how far you can go back to identify unclaimed capital allowances,” he said.
Economic Stability
Stability from the U.K. government could go a long way toward making business owners and hoteliers more confident. In 2022, four different chancellors of the exchequer introduced four different government budgets through the administrations of three prime ministers.
Neidle said there could be more surprises down the line, given that the rate of corporation tax has changed three times in a year.
“Only an optimist or an idiot would make any predictions at this point,” he said.
The tax increase is seen by some as another blow to U.K. competitiveness, but Neidle isn't so sure.
“Possibly yes, but the question is whether the alternatives would be worse, be it either an increase in tax elsewhere, a cut in spending or a deficit-funded tax cut that spooks the market,” he said.