Capital allowances has always been a key talking point in the hospitality sector. Whether it’s acquiring a new site or giving an existing location some TLC, the tax relief associated with the capital expenditure has been a welcomed bonus to businesses.
However, capital allowances is an area that has recently received additional scrutiny, with an increased number of HMRC enquiries and company checks being made by the revenue in recent months. Private Equity (PE) backed businesses benefiting from Annual Investment Allowance (AIA) have been of particular HMRC focus.
AIA provides companies with a deduction of up to £1m for qualifying plant and machinery costs against taxable profits in the year of expenditure. This £1m AIA must be shared by UK companies that are within the same corporate group or, groups that are held under common control which are “related” to one another.
But what is common control?
Two groups may be under common control if they both share the same controlling interest. In PE structures, this can apply if both groups are controlled by the same General Partner or fund SPV.
Control is defined as the power to secure the affairs of the company either:
- By means of the holding of shares or the possession of voting power, or
- As otherwise outlined in a legal document regulating the company.
For a partnership, control is defined as the right to a share of more than half of the assets and / or income of the partnership.
Determining the controlling interest within a group can be challenging. This is particularly relevant in PE structures which may use different forms of legal entity and be located across different jurisdictions within the group.
But if companies are held under common control, what makes them related?
A company is related to another company if one of following conditions is met:
The shared premises condition
This is where two businesses held under common control are operating from the same premises. It’s a condition which is rarely met for PE backed groups.
The similar activities condition
This applies to companies held under common control when both businesses derive more than half of their turnover from similar activities.
The similar activities definition can be widespread, and we’ve seen this apply to a number of PE backed businesses where the PE house has multiple investments across the sector.
Where these rules apply, PE houses will need to consider how the AIA is allocated across companies within their portfolio. Providing the £1m claim is not exceeded across all related companies, there is no restriction in allocating a larger portion of AIA to one portfolio group.
PE backed groups will need to consider the wider tax implications of allocating allowances across the portfolio. There are, of course, other reliefs such as first year allowances that may be available, but consideration will be needed across the different PE backed portfolios to ensure that the groups tax position is managed efficiently.
If your business needs support in maximising the capital allowances its claiming, please do get in touch with our hospitality specialists, James Gramston, Director (jgramston@haysmac.com) or Anna Pettitt, Assistant Manager (apettitt@haysmac.com), to find out more.
