Finance & Legislation

Furnished Holiday Letting Consultation

Following The Treasury’s 2009 Budget announcement that it proposed to repeal the Furnished Holiday Letting Rules, WASCO and the WTA have been working closely with numerous leading tourism trade associations, including:

England’s Tourism Alliance (ETA),
The British Hospitality Association (BHA),
The British Holiday & Home Parks Association (BH&HPA), and
The Federation of Self Catering Associations (FoNSCA): whose membership is:

The English Association of Self Catering Operators (EASCO),
The Association of Scotland's Self-Caterers (ASSC).
The Wales Association of Self Catering Operators (WASCO), and
Northern Ireland Self Catering Holiday Association (NISCHA).

In conjunction with these organisations, WASCO and the WTA have now submitted a document to HMRC in response to the consultation process. The following are extracts from the document; the full response is on the WTA web site – www.wta.org.uk.

Tax treatment of self-catering businesses - WASCO and the WTA recognise that there have always been ‘shades of grey’ in tax law on the distinction between property and trading businesses. It is noted in the Standard Note BT/5250 that in the 1970 Inland Revenue informally regarded the provision of holiday accommodation as a trading activity for tax purposes.

However, this practice changed in the early 1980s when Inland Revenue started enforce a more rigid distinction that treated self-catering as a property, rather than trading business. This change in approach caused considerable unrest within the sector, and in 1984, the Furnished Holiday Lettings were introduced in recognition these businesses are an important component of the tourism sector and that should be treated as a trading business activity for tax purposes, subject to reaching qualifying criteria designed to prevent abuse of the system by second homes owners.

Since the 1980s the self catering sector has grown significantly to the stage where it accounts for almost 20% of all domestic leisure holiday expenditure (£1.8bn per annum). Around 70% of this expenditure occurs in seaside and rural locations and employs 15,600 people directly and a further 24,900 in associated services such as country pubs, attractions and village shops. With the downturn in the UK economy, it is increasingly important that the jobs in these rural and seaside communities are protected.

The Financial Secretary, Stephen Timms has reiterated many times in Parliament and in private that the only reason that the FHL Rules are to be repealed is because of legal advice that had been received that said that the Rules may not be compliant with European law.

WASCO and the WTA have always accepted this position, but along with our colleagues in England and Scotland, we have been seeking that, rather than following the simplistic approach of repealing the FHL Rules and therefore jeopardising the viability of these businesses, the Treasury would take a more sophisticated approach and develop a solution that could protect rural and seaside jobs while still complying with EU requirements and protecting tax revenue. On this basis, we have continued to request that The Treasury enter into a meaningful consultation with the industry and officials from affected departments such as DCMS, DEFRA and their counterparts in Scotland and Wales, to develop such as solution.

It has been deeply disappointing throughout this process that, while The Treasury claims that it has to make a change that it would not otherwise have contemplated because without doing so it MAY not be compliant with EU law, it has not put forward an alternative proposal as to how self-catering properties could retain their status as trading businesses while complying with EU law.

Unfortunately, the response of The Treasury through the consultation period has simply been to state reasons as to why solutions put forward by the industry are unworkable. Indeed, the UK’s industry’s favoured proposal, to raise the FHL threshold for occupancy from 10 weeks to 15 weeks, has not even been included in the Impact Assessment despite it being supported by groups such as the Institute of Chartered Accountants for England and Wales and the Central Association of Agricultural Valuers.

FHL Repeal Guidance - One of the rationales used to reject the proposals put forward by the UK’s tourism industry is that retaining the FHL Rules would be unfair to other businesses that are taxed as property investment companies.

In line with our colleagues in England and Scotland, WASCO and the WTA find this argument spurious in that

the Treasury recognised this issue and did not consider the treatment unfair when the FHL Rules were first introduced,
there is no known evidence that other types of accommodation or property businesses have complained that self-catering businesses have an unfair advantage,
the market for self-catering properties (holiday makers) is totally separate from the residential lettings market (permanent residents); as there is no competition, there can hardly be an unfair playing field,
repealing the FHL rules would create unfairness between self-catering businesses and other accommodation businesses such as B&Bs, Guesthouses and Hotels, or
it would create unfairness in that self catering businesses would be considered property businesses but still be required to charge customers VAT.

Most significantly, there seems to be little fairness in treating a self-catering business differently to a budget hotel where there is little (if any) difference in the level of services provided, yet they are competing in the same market. Indeed many self-catering businesses provide a higher degree of service than most budget hotels.

In discussing where a business should be defined as trading or not, the current guidance states that;

“Essentially the distinction lies between the hotelier (who is carrying on a trade) and the provider of furnished accommodation (who is not). An important difference is that in a hotel etc. the occupier of the room does not acquire any legal interest in the property”

This clearly provides a starting point for considering self-catering properties to be trading as the customer does not acquire any legal interest in the property. It goes on to state that, to be considered trading;

“the taxpayer needs to show that what they offer goes well beyond the services normally provided by a landlord”

Following from the general principle above, this gives self-catering operators the opportunity to demonstrate that the services provided constitute trading activity.

However, the proposed new guidance is retrogressive in that the general principle of the customer not acquiring a legal interest in the property is removed and replaced with a new general principle that;

“a person who is in legal occupation of the premises, retains control over them, and provides services or facilities to a third party is trading; and”
“a person who allows a third party into occupation or possession of the premises for payment is carrying on a property business.”

As, by definition, the operator of a self-catering business does not occupy the premises, the new guidance makes it virtually impossible for any self-catering business to now be deemed to be trading.

In line with our colleagues in England and Scotland, WASCO and the WTA therefore requests that the Guidance be revised so that the current general principle is retained and that the guidance then goes on to describe the types of services an operator would have to supply to be deemed to be trading.

Critical potential impact of the Repeal - WASCO and The WTA are particularly concerned for the many self catering businesses which:

have been encouraged by Government (and its agencies) to develop their business by way grants and who as a result of repealing the FHL Rules may find their business is no longer financially viable. However, closure of their business means they will be required to re-pay part of any grant they may have been awarded, and
businesses that have developed properties subject to planning consents that either restrict their use to the provision of self catering accommodation only, and/or do not allow their occupation for a specified period.

Consent restrictions have been imposed so as to specifically prevent their use as a normal domestic dwelling.

Either or both of these consent restrictions apply to the majority properties developed by the many farmers who have been actively encouraged to diversify their businesses through the creation of self catering properties from their redundant farm buildings.

As a consequence of the above, some owners of self catering businesses will be in the position that not only is their businesses no longer financially viable (to them or anyone else) but their properties will in effect be worthless as their planning restrictions mean they cannot be sold as domestic dwellings.

Proposed Alternative Solution - UK self-catering businesses could be protected, and compliance with the EU requirement to apply the FHL Rules to owners of self-catering properties in Europe maintained, through simply increasing the number of weeks that a property had to be occupied by customers.

An analysis of 1,600 cottages in the UK and 900 cottages located in Europe that are managed by one of the UK’s largest self-catering management companies shows that UK properties have a much longer season than properties in Europe – and average of 18 weeks for UK properties versus 11 weeks for European properties.

Therefore, if the threshold for occupancy is raised from 10 weeks to either 15 or 20 weeks, this will disproportionately impact owners of properties in Europe.

Raising the occupancy threshold for self-catering properties would therefore concentrate the tax treatment benefits on UK self-catering businesses managed commercially while, as the same time, reducing the total cost to The Treasury from £20m per annum to either £16.7m or £12.6m depending upon the level to which the threshold is raised.

This solution also has the key added benefits of:

ensuring that owners of second homes do not take advantage of tax rules that are aimed at supporting genuinely commercial rural and seaside tourism businesses which support their local economy,
encouraging businesses operating at around the 10 weeks occupancy level to increase the size of their business, thereby adding further benefits to their local economies,
preventing self-catering businesses turning into seldom-visited second homes, thereby exacerbating the problem of “ghost villages”, and
avoiding the many court cases that will inevitably follow the repeal of the FHL Rules as self-catering business seek to demonstrate that they are trading businesses while HMRC seeks to tax them as property businesses.

Along with our colleagues in England and Scotland, WASCO and the WTA therefore requests rather than repealing the FHL Rules, The Treasury raise the occupancy threshold at which the FHL Rules apply to 15 weeks per annum from 5 April 2010 for a trial period of at least one year so that a proper analysis of the impact of the proposal and the impact of repealing the FHL Rules can be undertaken.

Bank of England Agents’ summary of business conditions for February

Over the Christmas and New Year period, retail sales were reported to be well up on the same period a year earlier. They had subsequently fallen back, with the adverse weather affecting sales across much of the UK.
Housing market activity had continued to recover, but there were more signs that the rate of growth had slowed.
While investment intentions remained muted, few firms planned a further round of sharp cuts following last year’s sizable reductions in spending.
Exports had continued to recover modestly.
Many contacts planned to maintain their inventories at low levels relative to sales.
Reports of growth or stabilisation in demand for professional and financial services had become more common. But demand for other business services remained subdued.
Reports of quarter-on-quarter growth in manufacturing output continued to outweigh those of shrinkage. Construction remained severely depressed.
The Agents’ sense of marginal improvement in credit conditions had strengthened in recent months.
The outlook for employment continued to improve slightly, with few contacts planning significant further reductions in headcount.
Few contacts anticipated encountering capacity constraints over the near term.
Inflation in per capita labour costs was expected to be positive but muted during 2010. Inflation in materials costs had ticked up and was expected to rise further.
Consumer goods price inflation had increased following the reversal of the temporary cut in VAT and the reduced scale of promotional activity relative to the same period a year earlier.

The Agents’ sense was that retail sales had recovered somewhat during 2009 Q4, and retailers reported that sales over Christmas and the New Year period had been well up on a year earlier. Initial indications were, however, that demand had fallen back in early January, when the heavy snowfall was widely reported to have impacted adversely on sales.

Demand for consumer services also appeared to have picked up since mid-2009, although any recovery had been less marked than for retail sales. Hotels and restaurants reported that sales volumes had been higher than a year earlier in the run-up to Christmas. Holiday bookings had also grown, although there were widespread reports that the inclement weather had affected demand.

Outside the professional services sector, any evidence of recovery in business services was even more patchy. Spending on corporate hospitality remained very weak relative to pre-recession levels — for example, a greater number of Christmas parties had been paid for by employees rather than their employers. And the extreme weather had impacted on a number of business services providers, with reports of cancellation of conferences.

The Agents’ sense of marginal improvement in credit availability had strengthened in recent months. But, as had been the case for some time, that loosening had not been felt uniformly across contacts. Access to finance continued to be delineated by firm size and sector. For example, reports of improved credit availability were more common among larger companies and those operating outside the property sector.

On average, lending spreads had probably narrowed a little through the second half of 2009, though they remained wide relative to pre-crisis levels. Reports of high fees and tough non-price terms (such as management information requirements) remained pervasive. Demand for finance remained weak.

The Agents’ contacts reported that consumer goods price inflation had increased sharply, reflecting both the reversal of the temporary cut in VAT and the limited scale of promotional activity. The VAT rise had also affected prices in the consumer services sector; but here, promotional activity remained pervasive.

For the full report, go to:- http://www.bankofengland.co.uk/publications/agentssummary/agsum10feb.pdf.