The owners of some furnished holiday let properties pay no council tax or business rates, as their property qualifies for small business rates relief providing 100% exemption.
In response to this perceived loophole, the Ministry of Housing, Communities & Local Government has issued a consultation document regarding short-term letting of holiday accommodation in England, and specifically the interaction with small business rates relief (SBRR).
It is suggested that there are 47,000 holiday lets in England, of which 96% qualify for complete exemption from business rates because of SBRR. The consultation document uses some rather imprecise language and refers to these properties as “second homes”. The concern expressed in the document is that owners of second homes “that are not genuine businesses may reduce their tax liability by declaring that a property is available for let, but making little or no realistic effort to actually let it out”.
The incentive for the property owner is that by maintaining that a holiday let property is liable to business rates so that SBRR applies, instead of paying council tax, there is no liability at all. This is because business rates take priority over council tax, and SBRR reduces the business rates assessment to nil. One difficulty with this assertion is that the local authority has a duty to assess whether a property is domestic or non-domestic.
The nub of the issue is that SBRR was introduced and extended without any thought for holiday let properties. Further, the government continues to use an archaic approach to assessing business rates and has resisted moving it onto a self assessment system.
In spite of these fundamental flaws in the system, this consultation proposes adding a possibly unnecessary legislative patch to try and overcome the enforcement difficulties. Further, the consultation does not address the disincentives to expanding a holiday letting business that SBRR creates.
Until George Osborne dramatically expanded SBRR, it was the case that 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 – something that was relatively easy to achieve as holiday letting properties do not sit comfortably within the business rates system.
An assessment to business rates is predicated on consistent commercial usage of a property from one year to another, so it is difficult to apply to properties that are inherently residential, and where both commercial and domestic usage is possible.
All fair enough, except that s.66(2B) Local Government Finance Act 1988 requires the letting to be commercial, for business rates to apply. The requirement for the letting to be commercial already seems to address the point at issue (inaccurate classification as a business premise), as discounted letting to family and friends does not amount to commercial letting.
Interestingly, the guidance on gov.uk only states: “If your property is in England and available to let for 140 days or more per year, it will be rated as a self-catering property and valued for business rates”. So the guidance isn’t consistent with the legislation.
What is proposed?
An option suggested in the consultation paper is a three-part test:
- in the current year, will the property be available for letting commercially for at least 140 days;
- in the previous year, was the property available for letting commercially for at least 140 days; and
- in the previous year, was the property actually commercially let for at least 70 days.
For those familiar with the income tax and corporation tax criteria for furnished holiday lettings, it is noteworthy that the pre-April 2012 availability requirement of 140 days is used, and not the higher figure of 210 days introduced from 6 April 2012. Indeed, whilst a change to introduce an actual letting requirement is being suggested (which would be consistent with the Welsh rules) this is 70 days a year rather than the tax rule of 105 days per year.
The consultation document raises a number of possibilities and seems to want to add more complexity to the interaction between council tax and business rates. The position is not helped by the lack of clarity on the mechanics as to how these changes are to be achieved.
Some more input on the thinking from tax specialists would probably help. The consultation closes on 16 January 2019, you can reply by email to [email protected] or post your comments below and we will reply on behalf of the AccountingWEB community.
About John Endacott
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 furnished holiday lets after the Pawson case.
John is the author of Furnished Holiday Lettings: A Tax Guide. Since the Budget in April 2009, he has been actively involved in advising on the proposed changes to the FHL regime and has appeared in the press and on radio and television to discuss the changes. John has been quoted in Parliament and has regularly met with officials from HM Treasury and HMRC to discuss taxation matters.