Revenue Tax Briefing Issue 60, August 2005
Section 34 Finance Act 2005 introduced a number of changes to the capital allowance regime for hotels, guesthouses, holiday hostels and holiday camps. Hitherto, capital allowances were available for capital expenditure incurred on buildings or structures in use or deemed to be in use for the purpose of the trade of hotel-keeping. Thus, capital allowances could be claimed for capital expenditure incurred on hotels, holiday camps (these were deemed to be in use for the trade of hotel-keeping) and a very small number of large guesthouses found to be effectively operating as hotels.
The main changes see specific provision being made for the first time for capital allowances for guesthouses and holiday hostels registered in the appropriate register kept by Fáilte Ireland under the Tourist Traffic Acts. This applies in respect of capital expenditure incurred on or after 3 February 2005. The expenditure can be written off over 25 years at the rate of 4% per annum. Capital allowances for hotels have been made conditional on the hotel being registered in the register of hotels kept under the Tourist Traffic Acts. The registration requirement applies in respect of capital expenditure incurred on hotels on or after 3 February 2005 but is subject to transitional arrangements. Finally, the new measures provide clarification that holiday camps must also be registered in the register of holiday camps in order to qualify for capital allowances.
It should be noted that there is no entitlement to capital allowances for expenditure incurred on youth hostels, bed and breakfast establishments and holiday apartments that are registered with Fáilte Ireland.
The position in relation to hotels and other holiday accommodation is outlined in more detail below.
The general position is that a hotel building must be registered in the register of hotels kept by Fáilte Ireland under the Tourist Traffic Acts in order to qualify for capital allowances in respect of expenditure incurred on the building on or after 3 February 2005. This new registration requirement is, however, subject to transitional arrangements. Where the conditions for transitional treatment are met, the requirement to be registered for capital allowances purposes is deferred and will only apply in respect of capital expenditure incurred after 31 July 2006.
The transitional arrangements involve certain planning conditions having been met by 31 December 2004. Where planning permission is required, a valid application for full planning permission for the work to be carried out must have been received by the relevant local authority by that date (or by 10 March 2002 where the application is made in accordance with the Local Government (Planning and Development) Regulations 1994). Where the work involved is exempted development for the purposes of the Planning and Development Act 2000, certain conditions must have been satisfied by 31 December 2004. There must have been a detailed plan in place in relation to the work to be carried out. There must also have been a written binding contract in place in relation to the expenditure to be incurred and work to the value of at least 5% of the development costs must have been carried out.
These transitional arrangements are similar to the transitional arrangements already in place in relation to the change in capital allowance rates for buildings used for hotel-keeping from 15% to 4% per annum (please see article also in this issue entitled “Transitional Arrangements for Property-Based Incentive Schemes”). The net position, therefore, is that a hotel project, which qualifies for transitional treatment, will not be concerned with the new hotel registration requirements for capital allowances purposes and may continue to claim allowances at the rate of 15% per annum in respect of all expenditure incurred on or before 31 July 2006. Expenditure incurred after that date on a hotel building will qualify for allowances at the rate of 4% per annum provided that the building is registered in the register of hotels.
Capital expenditure incurred on or after 3 February 2005 on premises used as a guesthouse will for the first time qualify for capital allowances provided the guesthouse is registered in the register of guesthouses kept under the Tourist Traffic Acts. Allowances may be claimed at the rate of 4% per annum. This does not have any immediate effect on a small number of guesthouses that had already established an entitlement to capital allowances on the basis that they were effectively operating as hotels. The position outlined above, in relation to registration and rates of capital allowances for hotels in the context of transitional arrangements, applies equally to any hotel-type guesthouse which may have qualified for transitional treatment. In any such case, the requirement to register as a hotel or guesthouse, as the case may be, for capital allowances purposes and the 4% capital allowance rate will only apply in relation to capital expenditure incurred after 31 July 2006.
Some registered guesthouses may be entitled to claim significant buildings relief under Section 482 TCA, 1997. That section provides for relief for expenditure incurred on the repair, maintenance or restoration of a building which is intrinsically of significant scientific, historical, architectural or aesthetic interest and which is, inter alia, in use as a registered guesthouse for at least 6 months of the year including not less than 4 months in the period from 1 May to 30 September. The section specifically rules out relief for any expenditure in respect of which relief can be claimed under any other provision of the Tax Acts. Questions may, therefore, arise in relation to expenditure incurred on such a guesthouse as to whether it qualifies for capital allowances or significant buildings relief.
To qualify for significant buildings relief the expenditure must be incurred on the repair, maintenance or restoration of the guesthouse. Any expenditure incurred on new build, such as an extension or the addition of extra rooms to a registered guesthouse is outside the scope of the significant buildings relief. However, where such expenditure is incurred on or after 3 February 2005, it can qualify for capital allowances.
Capital expenditure incurred on or after 3 February 2005 on a premises used as a holiday hostel will also for the first time qualify for capital allowances provided the hostel is registered in the register of holiday hostels kept under the Tourist Traffic Acts. Allowances may be claimed at the rate of 4% per annum. Previously, a holiday hostel would only have qualified for capital allowances if the hostel could establish that it was effectively operating as a hotel. The position outlined above in relation to the transitional arrangements for hotels will also apply to any such hostel that establishes entitlement to transitional treatment.
The pre-Finance Act 2005 position was that a holiday camp was deemed to be a building or structure in use for the purposes of the trade of hotel-keeping and thus entitled to capital allowances. While there is now a specific requirement from 1 January 2005 for holiday camps to be registered in the register of holiday camps kept under the Tourist Traffic Acts, this should have no effect on capital allowances entitlement. This is because the registration requirement has effectively applied all along as a premises could not have been described or held out to be a holiday camp unless it was so registered.
The Finance Acts 2003 and 2004 terminated the availability of capital allowances for expenditure incurred on registered holiday cottages subject to transitional arrangements. The Finance Act 2005 did not alter this position. The transitional arrangements ensure that capital expenditure incurred on a registered holiday cottage on or before 31 July 2006 will continue to qualify for capital allowances. To qualify for this treatment a valid application for full planning permission in respect of the holiday cottage must have been received by the relevant local authority on or before 31 December 2004.
Revenue has previously published a precedent whereby a caravan park approved by Fáilte Ireland and included in its register of approved caravan parks could be regarded as a holiday camp for capital allowances purposes. Accordingly, any building or structure erected in such a caravan park has been treated for capital allowances purposes as a building or structure in use for the purposes of the trade of hotel-keeping. This precedent is now being withdrawn. Accordingly, capital allowances will not be available in relation to capital expenditure incurred, but only with effect from 31 December 2005, on the construction of buildings or structures in caravan parks whether registered with Fáilte Ireland or not. Allowances in respect of expenditure incurred before that date will not be affected.
Fáilte Ireland administers a registration system for tourist accommodation such as hotels, guesthouses, holiday hostels and holiday camps. Details of the registration requirements are available at www.failteireland.ie.
There may be a delay of several months between the application for registration and the entry in the appropriate register as a building must be open and operating as a hotel, guesthouse etc. before it can be inspected and approved for registration. It may happen that expenditure is incurred on a building during a particular year or accounting period but because the building has not been registered before the end of that year or accounting period there is no entitlement to capital allowances for the expenditure incurred. In these circumstances, Revenue will accept a claim for capital allowances for expenditure incurred in a particular year or accounting period if the building has been registered by the return filing date for that year or accounting period. For individual claimants this will be 31 October following the end of the year in question. For corporate claimants it will be 9 months following the end of the company’s accounting period.
This practice applies only in relation to the year in which expenditure is incurred. It does not apply in relation to capital allowances for a subsequent year (for example, arising in relation to the same expenditure). Capital allowances cannot be claimed for any subsequent year for which the registration requirements are not met.
Enquires on this article should be addressed to firstname.lastname@example.org