Revenue loses hotel tax deductions case

The Inland Revenue has been defeated in its attempt to limit the scope of tax deductions in the hotel trade following an appeal to the special commissioners.

The commissioners supported the argument of hoteliers Croydon Hotel & Leisure that the company’s decision to terminate a management contract with Holiday Inns with a lump sum payment was revenue expenditure and, therefore, deductible from the owners’ tax bill.

The Revenue argued the payment of #2m to Holiday Inns, based on discounted profits over the life of the 20-year contract, should be regarded as capital expenditure.

Holiday Inns was due to build and run a hotel in Croydon, but pulled out at the last moment. CH&L took over the project and commissioned Holiday Inns to run the hotel. CH&L subsequently fell out with Holiday Inns and terminated the contract.

Greg Powell, a tax partner at Price Waterhouse, said he was disturbed the Revenue wanted to limit the scope for legitimate tax deductions in this area. ‘This decision will come as a welcome relief to hotel operators who employ external managers under management contracts. It is in the nature of things that these contracts sometimes go wrong and it would be a cause for concern if the costs prematurely terminating such contracts were disallowed.

‘The decision supports the view that termination of a management contract does not normally give rise to a capital expenditure,’ he said.

Powell added the commissioners had made their decision based on general accounting principles rather than relying solely on the facts of the case, ‘something they are doing increasingly’.