This is the second of a two part series highlighting key issues encountered when acquiring a hotel business.
Acquiring a business can be a complex, resource-intensive and time consuming process, yet attaining the right business can generate substantial value. The first article
in the series identified the first five issues: the right price, timing your purchase, proper due diligence, managing the bid process and funding your bid. Here are our final five issues to consider:
- Assess your management options – you need to be clear how hands-on you want to be. A management company can be expensive but their experience and expertise can be crucial to the future success of the hotel. In addition, depending on the size of the hotel, your experience and the lender’s requirements, an asset manager may be required, which again adds expense to the bottom line that needs to be taken into account.
- Withholding tax on interest – when arranging finance in order to acquire the hotel, it is important to bear in mind the withholding tax on interest rules. Broadly, if a UK resident company pays interest other than to a UK bank or a UK branch of an overseas bank, a withholding tax liability equal to 20% of the interest payments made will arise which will need to be paid over to HMRC. The beneficial owner of the interest must be considered, subject to treaty relief. If treaty relief is available, this should be claimed in advance before any interest payments are made.
- Eligibility for tax relief – it is important to take action to ensure that tax relief, in the form of capital allowances, will be available in respect of fixtures and fittings included in the hotel acquisition cost. This tax relief is likely to be substantial. For second-hand buildings, relief is not available unless the vendor and purchaser have formally agreed what part of the purchase price is to be allocated to fixtures (or the matter has been determined by a tribunal if it cannot be agreed). For acquisitions after 1 April 2014 (6 April for income tax), relief will only be available where the seller has previously allocated the items to a capital allowances pool. It is important that the purchaser ensures that the vendor has ‘pooled’ their expenditure and obtains sufficient documentation in order to be able to show that this is the case before the hotel is acquired.
- VAT implications – as a transaction-based tax, it is important to consider VAT when acquiring a hotel. Key points to consider at the outset are whether you are acquiring a business, assets or shares in a company, all of which may be treated differently for VAT purposes. If a business is being acquired, does it qualify as a VAT free transfer of a going concern? Other matters to consider are VAT registration (and the timing of that registration), whether it is necessary to opt to tax your interest in the property and consider whether adjustments may need to be made in respect of the Capital Goods Scheme. By considering VAT at the outset, the acquisition can be made in the most VAT effective and efficient way possible.
- Your future return on investment – what is your business plan post acquisition? Have you identified areas for revenue growth or cost savings? Do you know how much has to be spent on property improvements in the short and medium term? By answering these questions, you are demonstrating your strategy to increase the future return on your investment, therefore increasing the likelihood of securing funding and making a successful bid.
If you feel that the issues highlighted are likely to impact your acquisition or would like any further information, please get in contact
to discuss how we can help.
Our hotel experts
can advise at all stages and aspects of hotel owning, helping you to manage risk, minimise tax leakage, and deal with regulation, from both a UK and international perspective.
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