We have a new client who has one cottage to be used for furnished holiday lettings. I understand that this a "deemed trade" for Income Tax purposes (assuming conditions are met).
I believe we should complete the property pages of the SA return rather than the self employment pages.
Does National Insurance apply?
Cliff
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An alternative approach
An uninformed man on the Clapham Omnibus (into which category I must now regretfully consign myself) might be forgiven for relying on HMRC guidance in this area. Helpfully, they have issued a leaflet, still current, that is available online, called "IR56 - Employed or self-employed? A guide to employment status for tax and National Insurance contributions" Note in particular the final 4 words in the header. It is here
http://www.hmrc.gov.uk/pdfs/ir56.htm
That document links in turn to the Employment Status Manual, here
http://www.hmrc.gov.uk/manuals/esmmanual/
This manual itemises particular businesses for special treatment. Nowhere does it highlight the business of being a landlord as requiring particular or special treatment. Interestingly, neither does it consider any of the cases Griffiths v Jackson, Rashid v Garcia, American Leaf Blending Co Stn Bhd v Director-General of Inland Revenue, or several others as worthy of mention in the section dedicated to tax cases. Nor do the keywords "furnished", "letting", "accommodation", or "landlord" produce any hits in a search of the entire HMRC NI manual. "Holiday" and "rent" produce 23 and 7 hits respectively but nothing to do with this issue.
If landlords are not special cases, then it is not unreasonable to assume that they fall within the general case. For the general case we refer back to IR56 (at least as far as HMRC guidance is concerned). The section within IR56 that addresses whether you are self-employed (and remember the header - this applies for NIC as well as tax) lists several questions which are almost entirely not applicable to the case.
I think that if HMRC were to win a case on class 2 NIC in respect of a single property income source after a taxpayer has reasonably applied the above criteria then I would certainly resist any suggestion of negligence.
Another worrying point
On re-reading all of this it seems that anyone in receipt of rental income of any category (not just furnished holiday accommodation) is potentially chargeable to class 2 NIC, the critical issues being (1) the profit motive and (2) the amount of time devoted to the activity of generating rents. In concert, these two factors could be tantamount to a "business" of gainful employment otherwise than as an employee, despite that the activity would not comprise a "trade, profession or vocation". Neither of these two factors is relevant in determine whether the activity falls within "furnished holiday accommodation" for Income Tax purposes, although in reality such an activity might in practice require more management time than other categories of letting.
The greater "penalty" for failure to register would likely be the loss of fee protection insurance cover against tax investigations, rather than the liability to NIC and associated pecuniary penalty. I feel an internal memo coming on.
I stand corrected, and thanks to Nigel.
My link only refers to class 4. It is unhelpfully silent on Class 2, and understandably so, since the answer is far from clear.
Having read through Griffiths v Jackson it does not appear to consider the Class 2NIC consequences within the body of the case; its relevance is interpreted in a subsequent exchange of letters with the then DSS whose statutory force is questionable.
As I understand it, Griffiths v Jackson involved a partnership managing 11 properties. By contrast, Rashid v Garcia (Status Inspector) [2003] STC SCD 36 Sp C 348, a case which was expressly about Class 2 chargeability, was held to be non-chargeable (4 properties), although only on the facts, not on the principle (that it is potentially chargeable).
The correspondence with the DSS elicited their "rule of thumb" that 8 hours devotion of management time per week would be their yardstick, but that may subsequently have been withdrawn and certainly has no backing in law.
Subsequent to Griffiths, there seems to have been some water passing under the bridge. The intention of parliament has been clarified: To align the definitions for tax with those for NIC (847 House of Commons Debates 5th Series Col 124, and White Paper 'Lifting the Burden') so perhaps Pepper v Hart might have some influence.
Anyway, all very interesting but still not exactly certain. I think I would take issue with the certainty of "Yes, class 2 is payable and you have to register", but as you say the small earnings exception would likely apply. HMRC will not normally levy a penalty for non-registration if demonstrably the exception would have applied, but if you have fee protection insurance cover it may be safer to register and except.
Yes, No & Yes!
Yes, it is property income and the property pages have a special section for it.
No, there is no Class 4 due but it is taxed in all other ways as if it were trading income.
Yes, Class 2 is payable and you have to register. However most FHL will be below the exception limit so apply for exception at athe same time.
Class 2 is due because FHL is "self-employed earnings" for NIC (Griffiths v Jackson [1983] STC 184) unless there is very little actual involvement with the running of the FHL. As they say, it all depends........