Holiday lets and business rates

Michael Gove announced on 14 January 2022 that the rules relating to business rates payable by furnished holiday lets will alter from April 2023. These changes only relate to the rules in England. They follow a consultation document that was issued on 7 November 2018 and an announcement in the March 2021 Budget.

The announcement describes the current position as a ‘tax loophole’. However, the extent that it is one is entirely of the Government’s own making and comes from deficiencies in the rules on business rates and from previous Government attempts to alleviate some of the problems caused by business rates with the introduction of small business rates relief (SBRR).

Furnished holiday lets are commercial lets and so subject to business rates. The reason for the opportunity for those properties to not pay council tax and be subject to business rates, but then not have any tax liability, is because of SBRR. 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.

It is very reasonable for the Government to tighten up these rules and it is only surprising that it has taken as long as it has for them to take action. Wider 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.

The Government is introducing a 140 day availability condition and 70 day letting condition in the year preceding the day of assessment for business rates. There are differences between the rating rules for holiday lets properties in the different countries of the UK and this change will broadly bring the criteria in England into line with Wales, and Scotland is making similar changes from April this year.

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:

1. 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
2. During the previous year, it was available for letting commercially, as self-catering accommodation, for short periods totalling at least 140 days
3. During the previous year, it was actually let commercially, as self-catering accommodation, for short periods totalling at least 70 days

There is already a requirement that lettings must be commercial, 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. As far as day counting is concerned, the position for a day for business rates or council tax purposes is taken as that which existed 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 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.

There are also 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).”

So, there is a tax increase for newly let properties and this is something that owners (and their accountants and tax advisers) need to be aware of when setting up a new furnished holiday let.