Restaurant Capital Allowances: Tax Relief for Hospitality

Where a business buys a car or a computer or some heavy machinery, the cost will naturally be classified in the accounts under some appropriate heading. Claiming capital allowances is then straightforward, subject only to the quirks of different rates of allowances and other special rules.

In relation to property, though, there is a potential problem.

Statutory references in this article are to the Capital Allowances Act 2001.

Suppose that a company buys a care home and that the sale and purchase agreement shows £3 million for the property and £100,000 for fixtures and fittings. An analysis shows that the £100,000 relates entirely to moveable furniture, including beds, tables and chairs.

The accounts allocate the £3 million to property and the £100,000 to fixtures and fittings. A capital allowances claim is made for the £100,000 but no claim is made for the property.

In this scenario, a huge claim is being missed, as a substantial part of the £3 million may also qualify for plant and machinery allowances. The missing claim here relates to the fixtures in the property, and it is important to remember that the term “fixture” has a specialist capital allowances definition, different from the way the term is used for accounting purposes (s. 173).

It is not far-fetched to think that the missed claim could represent a potential tax saving of several hundred thousand pounds for a limited company (and even more for an individual or a partnership, because of the higher income tax rates). This is a wholly legitimate tax saving, not remotely provocative to HMRC as long as the claim is correctly made and the rules about entitlement to claim are fully respected.

If you have recently opened or renovated a restaurant, are you missing out on valuable tax relief?

Those working in the food industry need no reminders about how business expenditure has increased in the past year. For businesses that do nevertheless succeed, tax is the next unwelcome cost before proprietors can finally enjoy the rewards of their labours.

The good news for restaurant owners is that one important form of tax relief – capital allowances – is often underclaimed.

Valuable tax savings are available where a person has recently bought, built, extended or fitted out a restaurant (or hotel or pub or other licensed premises).

A few businesses miss out on these allowances altogether. Much more frequently, though, businesses claim less than they are entitled to. This is because claiming capital allowances in relation to property is a specialist area of tax, subject to its own rules, which can be complex.

Getting the claim right is obviously vital, and many accountants who are confident about formulating a capital allowances claim for everyday items, such as cars and computers, are less sure of how to do it for commercial properties.

Most accountants acting for restaurants will claim for “obvious” items, such as tables and chairs, and probably also for kitchen equipment, such as ovens, fridges and freezers, and perhaps for decorative assets.

But the rules become more difficult when it comes to claiming for items that legally form part of the property – for example, the hot and cold water systems, alarms, central heating, air conditioning and ventilation, lighting, other electrics, wash basins and WCs.

Capital allowances claims can properly be made for all of these items, and as long as the claim is correctly made, it will not cause any problems with HMRC.

Such a claim is much more than just a cash flow exercise – with proper professional guidance the tax savings are not only substantial but permanent.

These allowances are available for limited companies, partnerships and sole traders. The business incurring the costs of the building work must have some legal interest in the property, but that interest can be either freehold or leasehold.

Here are three very simple scenarios to show when these opportunities to claim capital allowances may arise.

Building a new restaurant

A Ltd acquires land adjacent to a large housing development and constructs a brand new restaurant.

No allowances are due for the land cost, but a substantial part of the build cost (perhaps 40%) will qualify for valuable plant and machinery allowances (PMAs), giving rapid tax relief. The same is true of the bulk of the fit-out costs.

Most of the remaining construction costs will qualify for slower relief by way of structures and buildings allowances (SBAs).

The same principles apply if an existing restaurant is extended.

Buying an existing restaurant

B Ltd acquires an existing restaurant business, either buying the freehold or paying a lease premium. The cost is split between the property and goodwill.

A substantial part of the property acquisition cost may qualify for PMAs. The detail is vital, and a good outcome is much more likely if professional capital allowances advice is taken before negotiating with the vendor, or at least early on in the process. Tax relief may be available on anything between zero and perhaps 30% of the acquisition cost.

Once more, SBAs may also be available, depending mainly on when the restaurant was originally built.

Renovations

Charlie and Claire have a leasehold interest in their popular restaurant, which they have run for 12 years. The décor is getting tired and they want to rearrange the layout so as to fit in two additional tables. They decide to close for six weeks, and they strip out all the fixtures and fittings and start again.

A very high proportion of this expenditure can qualify for PMAs. In this scenario, there is also a final opportunity to review other allowances for the items that are being stripped out, potentially doubling up the possible tax relief.

If the property was constructed, renovated or extended some years ago, it is not too late to make a claim now. The position is more complicated if it was bought from a third party more than a year or two ago, and it may be that some of the potential tax breaks have been lost forever. However, even in this scenario there can be a potential claim.

At Six Forward, we make valuable claims all day every day, and our first step is always to check whether a legitimate claim can be made. So why not let our team take a look and give you an honest appraisal? Our review won’t cost you a penny, and you will be under no obligation.

If no allowances are due, we will explain why not.

But if there are opportunities for you to save tax, we will spell out how it will work. If you then choose to instruct us, we will work alongside your existing accountant, providing the exact details to include on your tax return, and explaining the full legal basis on which the claim can be made.

Can I still make capital allowance claims if I have a leasehold interest rather than owning the freehold?

Yes. Both freeholders and leaseholders are entitled to claim capital allowances, provided they have personally incurred the capital expenditure. The key point is that the person claiming capital allowances must have a legal interest in the property. Whether you have paid a lease premium or funded a complete fit-out of a "shell and core" unit, the law allows you to claim allowances for the fixtures and fittings you have installed to make the space operational. This is particularly important for hospitality businesses investing in office space or bar areas, as such businesses typically have a high level of expenditure qualifying for capital allowances.

How does the Six Forward expert team work alongside my existing accountant?

We operate as a technical extension of your accountant’s service. Most accountants are experts in general tax but may not have the surveying expertise required to identify and value assets embedded within a building's structure. Our expert team provides the precise figures, qualifying items, and technical reports your accountant needs to include in your tax return, ensuring a seamless and collaborative process to maximise your capital allowances claim while minimising fees.

Is it too late to claim capital allowances if my restaurant was renovated several years ago?

Not necessarily. If the assets are still in use by your business and you still hold an interest in the property, we can often identify unclaimed capital allowances from previous years and help you claim a tax refund. While the rules are more complex if you purchased the property from a third party more than two years ago, a legitimate claim can often still be made under certain circumstances, providing crucial financial benefits.

What is the difference between Plant and Machinery (P&M) and Structures and Buildings Allowances (SBA)?

Plant and machinery allowances (PMAs) apply to the functional, claimable items that allow you to run your restaurant, such as lighting, heating, kitchen equipment, and bar fittings, offering faster tax relief. Structures and buildings allowances (SBAs) apply to the physical shell, such as walls, ceilings, and office space. While SBAs provide relief at a slower flat rate of 3% per annum, they ensure that almost all of your construction expenditure receives some form of capital allowances tax relief, helping to reduce your income tax or corporation tax liabilities over the life of the property. There are also different tax treatments when you come to sell the property.

What qualifies as restaurant capital allowances in the hospitality industry?

Capital allowances are a crucial statutory tax relief allowing you to deduct the cost of specific qualifying items when calculating your taxable income. In a restaurant, this extends far beyond "loose" items like ovens or furniture. It includes "integral features" such as your commercial kitchen's plumbing, heating systems, electrical systems and air conditioning. Allowances can also be claimed for items such as bar fittings, and even specialised floor finishes or decorative assets that create the specific atmosphere of your brand.

Which items in a commercial property typically qualify for the fastest rate of tax relief?

Items classified as plant and machinery (P&M) generally offer the most rapid capital allowances tax relief. In your hospitality industry sector, this includes kitchen equipment, fire alarms, security systems, heating systems, and bar fittings. Many of these claimable items qualify for the annual investment allowance (AIA), which can provide 100% tax relief in the first year, significantly aiding your business’s cash flow during the critical early stages of opening or renovation.

Will working with an expert team to make a specialist claim increase the risk of an HMRC enquiry?

No, provided the claim is technically robust, correctly documented, and includes all eligible claim allowances. Capital allowances are a legitimate tax relief defined by the Capital Allowance Act 2001. Our expert team provides the full legal and surveying justification for every item included, ensuring that your claim is fully compliant and stands up to professional and HMRC scrutiny, giving you peace of mind while maximising your financial benefit.

Restaurant Capital Allowances for Hospitality Businesses