De Vere Group, the hotel and leisure club operator, was counting the cost of a one-off £9.3m VAT charge yesterday as it reported a drop in interim pre-tax profits of nearly 80 per cent to £3.6m compared with £16.5m for the same period in 2002.
The charge was imposed following a hearing in December last year which ruled that the hotelier, which also runs complexes at 13 golf clubs, including the lucrative Ryder Cup venue the Belfry hotel in north Warwickshire, had been wrongly claiming tax exemption.
From 1997 to 1999 a subsidiary of De Vere had claimed its golf and leisure subscription revenues were exempt from VAT under a clause covering not for profit organisations.
However, the company stressed the charge would have no immediate effect on its business and said it planned to lodge an appeal against the decision.
Not counting the exceptional charge, pre-tax profits at the company were down 5 per cent to £15m, despite turnover rising 7 per cent to £150.2m from £140m previously.
De Vere, whose portfolio includes 21 upmarket De Vere hotels and 14 Village hotels, has escaped the downturn in demand for corporate conferencing by switching the focus of its hotel business towards providing for leisure clients.
The company has also spent money on developing a series of new locations, including a £12m refurbishment of the Cavendish Hotel in St. James's that was completed last December.
Paul Dermody, the chief executive of De Vere, said: "Our operating profit is level, which, given the current market, is a remarkable performance.... We've got the building blocks in place and that's good for the future. I've spent the money but not got the profit yet."
Nigel Parson, an analyst at Williams de Broë, said: "The results were lower than most people expected. They've done a good job keeping their hotels busy by replacing businessmen with leisure clients, but it's had a big impact on their margins. The VAT charge will affect their cash flow but won't be a major problem."
Shares in De Vere closed the day 5.5 per cent down at 325p.