Tax Essentials – Guest Houses and Owner Occupied Hotels

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The decision to purchase a guest house or hotel can be a stressful time for most, and understanding your options is crucial to achieving your future aspirations.  The day you commit to buy a business is the first day of your commercial journey, from which you should have a clear strategy and be making decisions based upon your eventual goals and ambitions.

The best approach to purchasing a business will be dictated by the current structure put in place by the vendor, although you should remember that you can control the outcome.  In essence there are two types of purchase as explained briefly below:

Share Purchase

A share purchase is possible when the existing business is already contained within a limited company, with the most distinct advantage being a reduced rate of stamp duty.  The purchase of shares attracts 0.5% stamp duty as opposed to stamp duty land tax rates of up to 5%.  It is essential that this option is explored in any purchase if possible, especially given the values of land & buildings associated with these types of business.

The two areas of concern with a share purchase are firstly due diligence and secondly a lack of tax reliefs on purchase.  When buying a limited company, due diligence is imperative to make sure that any financial risks are protected as you are buying the company and the associate history.  As you are buying the company, you effectively take control and don’t attract any immediate tax reliefs, a point which can usually be used as a bargaining tool on the purchase price.

The lack of tax reliefs for a buyer when purchasing a company, combined with tax advantages of a share sale for the vendor will always ensure you can open a negotiation, resulting in an optimum position for both parties.

Purchase of Trade and Assets

This is the most common type of transaction, especially as it applies to all types of existing business entity.  As a buyer you will be purchasing the business assets which will sometimes include the property alongside the goodwill of the business. In this situation the vendor is likely to want to apportion between the asset categories in a way which is the exact opposite of what you as a buyer want to achieve.  As a buyer you should be striving to agree an apportionment as follows:

• Goodwill – as low as possible as no tax relief is available throughout the business lifecycle, this only acts as a base cost when you sell the business.
• Property – as low as possible to reduce the cost of stamp duty land tax and because no tax relief is available throughout the business lifecycle, this only acts as a base cost when you sell the business.
• Fixtures, Fittings & Other Assets – These items are likely to attract tax relief in full in the year of purchase and as a consequence a buyer wants these to be as high as possible in the apportionment.

Another consideration following agreement to purchase the trade and assets of a business is to decide how you wish to operate. You can make this purchase individually as a sole trader, as a collection of individuals through a partnership, through a newly formed limited company, or an existing entity if you already have one. There are a number of considerations when deciding the type of structure to use, and it is imperative to seek advice from a qualified professional before a decision is made.  By not seeking the right advice you are likely to pay more in costs or taxes throughout the lifecycle of your business, and when you come to exit.

The structure will also dictate your annual compliance needs with defined deadlines and requirements for each structure.  Partnerships and sole traders are governed by HM Revenue & Customs under Self Assessment with key deadlines below, with limited companies dealt with under the Corporation tax regime.  As a director of a limited company you will also be governed under Self Assessment with an annual need for a personal Tax Return.

Key Deadlines for Self Assessment:

• 31 January following the end of the tax year to 5 April – Submission of Self Assessment Tax Returns for partnerships and individuals and payment of tax liability
• 31 July – payment on account of tax liabilities where required

Key Deadlines for Corporation Tax:

• 9 months from the end of the accounting period – submission of the company statutory accounts to Companies House
• 9 months and 1 day following the end of the accounting period – payment of corporation tax liability for the accounting period
• 12 months following the end of the accounting period – submission of the company corporation tax return

Day one of your business journey is as important if not more so than every day which follows. Setting your business up in the right way for your circumstances and achieving the optimum purchase will position you in the best way possible for the future.  Tax should never be the only motivation for decisions, although you should always seek professional advice to maximise your position!