How do you encourage investment in the industry? By taking away a tax incentive!

How do you encourage businesses to invest more? By increasing taxation!

You think these are Alice in Wonderland ideas? Well, so they are. But they are also the ways in which the government claims it is helping industry to meet the challenges (Gordon Brown’s favourite word) of the future.

It’s common knowledge that the hotel industry is investing about £3bn a year in the construction of new hotels and refurbishments, and has done so for the last five years. Investment in other sectors of the industry – restaurants, attractions, for example – is equally strong.

There’s also no doubt that such a high level of investment is essential if Britain is to maintain a place at the top table of tourism destinations.

To ‘encourage’ this investment, the Chancellor has decided to scrap the Hotel Buildings Allowance without any prior consultation with the industry or other government departments. Does this make sense? Of course not. Will new construction and expansion decline? Of course it will. Will this help grow the UK economy? Of course not. Will this help UK tourism fight global competition? Of course not.

With so many negatives piling up, it’s difficult to see any sense in the Chancellor’s decision.

And then, to pile the pressure on the industry, he has increased small business taxation to 22 per cent by 2009. So not only is the industry getting far fewer tax advantages in building new hotels (and extensions and refurbishments) but the profits that are needed to fund re-investment in the first place will be taxed at a higher rate in the future.

If this is helping the industry meet the challenge of the global economy (another favourite Gordon phrase) then the logic is very peculiar. It’s not one that any business in the hospitality industry would recognise.

Hotels and other hospitality businesses are in it for the long-term. It’s a capital intensive industry in which most developments run well into seven figures. Yet this is very much a small unit industry - most hospitality businesses employ fewer than 25 people and it is often difficult for them to attract investment funds from lending sources. We’ve already had news of some hotel projects falling by the wayside as a result of the loss of the Buildings Allowance; no doubt, there will be more when developers and investors finally add the figures up. The pinch will come in 2009, when the higher rate of small business tax comes into force, which is estimated will take at least £80m out of the hotel industry alone.

All this is at a time when Britain is already regarded as a high cost destination, making it more difficult to attract overseas visitors (though the numbers are remarkably buoyant at the moment). But if we do not continue to maintain and enhance our facilities and constantly strive to improve quality, then UK tourism will not be able to compete.

Which makes the Chancellor decisions all the more puzzling. So how can you increase investment by withdrawing tax allowances and increasing taxation? Ask the Chancellor? Unfortunately, he’s not saying.

Bob Cotton

Chief Executive British Hospitality Association