TAX experts have called for a more generous depreciation allowance for decoration and refurbishment in hotels and restaurants. The depreciation allowance for the decor of restaurants and hotels did not reflect economic reality, leading accountants said. They said the classification criteria used by the Inland Revenue department was too rigid and neglected the indispensable function played by interior decorations. Depreciation allowances are divided into three categories. Machinery and plant are subject to an initial allowance of 60 per cent on capital expenditure together with an annual allowance on the remaining balance at 10 to 30 per cent, calculated on a reducing balance basis. Industrial buildings are subject to a 20 per cent initial allowance and an annual four per cent allowance on the construction costs of the building. Commercial buildings, including hotels and restaurants, are entitled to a commercial rebuilding allowance of two per cent a year. Any expenditure on decoration, structural improvements, fixtures and fittings fall under the commercial rebuilding allowance. Critics said decoration and refurbishment were vital for hotels and restaurants and should be classified as plant and machinery. 'The definition of plant and machinery is something removable and reusable such as beds and tables,' Deloitte Touche Tohmatsu partner Yvonne Law said. 'Interior decorations such as marble walls and pillars are granted a commercial rebuilding allowance as the items are attached to the premises and cannot be removed,' she said. She said a body of case law widened the definition of plant and machinery to include items used by the owner in conducting his business. 'Interior decorations must be refurbished all the time to enhance the atmosphere in a hotel and to facilitate the business. They should thus be defined as plant and machinery as well but the Inland Revenue department does not accept this argument,' Ms Law said. At an annual rate of two per cent, decoration costs would take 50 years to write off but common practice in the hotel industry was to frequently refurbish interiors to maintain asset value and competitiveness. Price Waterhouse's tax partner, Patrick Paul, said the existing tax allowance on decoration expenditures did not reflect economic reality. 'The hotel industry has a good reason to ask for a depreciation significantly higher than two per cent for refurbishment expenses,' Mr Paul said. He said the Government should increase the commercial rebuilding allowance, possibly to as high as 20 per cent. The accountants' argument echoed calls by the Federation of Hong Kong Hotel Owners for a more generous tax allowance. 'The function of renovation in hotels is similar in nature with ordinary plant and machinery in factories. Both are used to increase productivity,' the federation's executive director, Michael Li, said. 'The cost of a major renovation in a five-star hotel may range from $40 million to $100 million. To give a depreciation allowance on this expenditure would no doubt encourage more investment,' he said. The Commissioner of the Inland Revenue, Anthony Au Yeung, said the industry's demands could lead to a $10 million loss in tax revenue for the first year alone. 'The call for change is under the government's consideration in the context of the government's budget condition and budget strategy,' he said.