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Tax relief for restaurants – are you maximising the potential claims for your clients?

Author

Robert Wilson

As a Senior Tax Manager, Robert works across all levels of the business to aid and abet the delivery of tax advice across ETC’s broad and varied client base. He has a particular interest in the tax affairs of owner managed businesses and the personal affairs of the company shareholders, including profit extraction, exit planning and family wealth preservation.

It is fair to say that the current global pandemic has had a major impact on the hospitality sector. That much is clear with the introduction of the Governments ‘eat out to help out scheme’.

But the Government has also recently announced new measures to curb obesity. How therefore can you assist your clients in the hospitality sector whilst watching our collective waistlines to keep Jamie Oliver happy?

We consider two reliefs to tax, both of which are highly relevant but often under utilised for the hospitality sector. Capital Allowances and Research and Development reliefs.

Capital Allowances

Consider a new restaurant start up looking to offer a unique Scandinavian dining experience. They have acquired a ten-year lease to premises in central London and have spent £300,000 kitting out the building to create an ambient, attractive and functional restaurant, kitchen and bar area.

These facts are common. More often than not, a client starting out in this manner will not simply be able to locate suitable premises that they can move into straight away without at least some major fit out works. As such, within their first year of trading, some considerable expenses will be incurred.

Typical expenditure will be on items such as: –

  • Kitchen equipment
  • Alterations to the internal space including plumbing and electrics, air conditioning and washroom facilities
  • Tables and chairs and other furniture
  • Crockery, cutlery and glassware • Lease repayments
  • ‘Niceties’ such as decorations, carpets etc.
  • And many more…

Whilst many advisors will be aware of the straightforward capital expenditure qualifying plant and machinery (P&M) items, i.e. chairs, tables, crockery etc. but there are several opportunities to dig deeper and thus ensure that any claim for capital allowances is maximised. We have outlined some of the more usual ‘missed’/’problematic’ areas below. Where there is any ambiguity of doubt, specialist advice should be sought so as to ensure that all expenditure is correctly identified, thereby maximising any potential claim.

Fitting out

When fitting out or refurbishing a restaurant, the construction expenditure is generally not very well detailed, therefore potential capital allowances are not easily recognised. The construction costs may just be a high-level summary, where a non-specialist may not have the expertise to fully identify these costs and thus may miss the opportunity to claim for capital allowances.

The construction costs are typically comprised of qualifying P&M such as heating and cooling systems, electrical services, sanitary fittings, hot and cold-water services etc. However, descriptions such as ‘finishes’ may include eligible items e.g. carpets and some specialist ambient finishes, as well as ineligible items such as tiling. Surveying and valuation skills are required to split these costs adequately between P&M and repairs.

Ambience

Furthermore, restaurants will have qualifying items of P&M that create ambience or atmosphere. There is no defined list that states what ‘ambience’ qualifies as P&M. Many items have become allowable through case law.

Therefore, where ambience is of importance to the trade, such as in hotels and restaurants, the definition of qualifying P&M is wider than, say, an office building. It can often be a complicated exercise as the tax case law in this area is still developing. Qualifying items may include:

  • Artwork
  • Decorative assets
  • Specialist finishes

Enhanced capital allowances (ECA)

There may be scope for 100% allowances for green plant such as lighting and air conditioning, electric hand dryers and water efficient toilets. The ECA Scheme lets businesses that invest in certain energy-saving equipment and write off the full cost of the compliant equipment against their taxable profit in the first year, thus providing 100% tax relief. These would otherwise attract the lowest writing down allowance at 8%.

Lease

It may be possible for them to claim capital allowances on any existing P&M contained within the building depending on the terms of the lease. Possibly as well the client might be entitled to claim for capital allowances on the capital element of lease payments.

R&D

A thorough analysis of the client’s restaurant may lead you to discover that there are a myriad of ways that they can achieve innovation and stake a claim for R&D tax relief. In the food and beverage industry, this can include:

Food

  • Improving the texture, taste and nutrition
  • Testing sustainable or new ingredients
  • Creating new samples within a test kitchen environment

Packaging

  • The creation of new packaging to improve durability and shelf life
  • Using environmentally friendly materials in packaging, or alternative materials to improve packing

Process

  • Creating new methods that will reduce costs and improve product consistency
  • Improvements to equipment and machinery to ensure food is handled safely

Sustainability Efforts

  • New methods for reducing scrap, contamination, spoilage and waste
  • Efforts to using utilities, water, fuel and energy more efficiently with the introduction and integration of new technologies
  • Testing out new processes to convert waste to energy

You may find through analysis of the business that there are a number of areas on which R&D may be identifiable.

How can we help?

We are experienced in assisting our clients and their advisors with the identification and the making of both claims for capital allowances and R&D tax credits, thereby ensuring that relief for tax is maximised.

Crucially though, the two reliefs can interact. It is essential to ensure that the making of either claim does not jeopardise the other. Please do get in touch should you require any assistance.

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