FHL: Gove closes business rates loopholeby
The rules that allow some landlords to escape both business rates and council tax on their furnished holiday let (FHL) properties will alter from April 2023, as John Endacott explains.
The FHL tax changes announced on 14 January by Michael Gove MP only relate to the rules applicable in England. They follow a consultation document in November 2018 and an announcement in the March 2021 Budget.
There are differences between the rating rules for holiday let properties in the different countries of the UK and these changes will broadly bring the criteria in England into line with Wales, while Scotland is making similar changes from April 2022.
Government made loophole
The “tax loophole” described in Gove’s announcement is one entirely of the government’s own making. It arises from deficiencies in the rules on business rates and from previous government attempts to ameliorate some of the business rates problems caused by introducing small business rates relief (SBRR).
Furnished holiday lets are commercial lets and so are subject to business rates, instead of council tax, but they have nil business rates tax liability because of SBRR. Until George Osborne dramatically expanded SBRR, the council tax due on a holiday let property (classified as domestic premises) was lower than if it was assessed to business rates (classified as business premises). The incentive was therefore always to avoid an assessment to business rates.
Change from April 2023
It is very reasonable for the government to tighten up these rules. What is surprising is that it took so long to take action. Wider business rates reform would have been a better solution, and perhaps the reason for the delay in targeting this “loophole” is because the Department for Levelling Up had hoped that Rishi Sunak was going to do that in his last Budget.
Under the new rules in England, a property will be assessed for business rates rather than council tax only if the owner can provide evidence that:
a) It will be available for letting commercially, as self-catering accommodation, for short periods totalling at least 140 days in the year after the day in question
b) During the previous year, it was available for letting commercially, as self-catering accommodation, for short periods totalling at least 140 days
c) During the previous year, it was actually let commercially, as self-catering accommodation, for short periods totalling at least 70 days.
Must be commercial
There is already a requirement that holiday lettings must be commercial to pay business rates and these changes seem designed to make enforcement easier and to be more objective. By dealing with matters retrospectively, a more factual approach is possible.
For a day of letting to count for business rates or council tax purposes, it is the position taken at the end of the day, so a property let out from Friday evening to Sunday morning would have been let for two days.
There are no special rules for those with multiple units on one location and the rules will only apply to buildings (or self-contained parts of buildings) that would otherwise be assessed for council tax. So, caravans, shepherds huts and similar units will not generally be subject to these rules as they are assessed for business rates separately.
Most importantly for accountants and tax advisers, there are no special rules being introduced for newly available holiday lets (or that are purpose built as holiday lets). These will be liable for council tax for each day until the property has been available for 140 days and let out for 70 days. On the day that these two criteria are met it will qualify for a business rates assessment.
The Government’s consultation response gives the following example on this: A property that is first advertised as a holiday let would be liable for council tax for the next 140 days. If it was actually let out for 70 of these days, on day 141, it would qualify for a business rates assessment (provided the owner intended to advertise it for 140 days in the coming 12 months).
There is a tax increase for newly let properties and this is something that accountants and tax advisers need to be aware of in advising furnished holiday let start-ups and in preparing accounts for newly let properties.
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John Endacott BSc (Econ), FCA, CTA (Fellow) heads up the tax practice at PKF Francis Clark. He advises individuals, corporates, partnerships and trustees – specifically in relation to property matters, business transactions and capital taxes. He is a national expert on business property relief and investment activities following his work on...