Business rating of holiday cottages
Posted on: February 9th 2024 · read
From April 2023, new eligibility rules for business rates apply to self-catering properties such as holiday lets in England and Wales. However, these changes create significant challenges due to the complexity and overlap of the rules.
Updated eligibility rules for business rates to self-catering properties
Furnished Holiday Lets (FHLs) which meet the conditions regarding availability and occupation are, for income tax and capital gains tax purposes, treated as if they were a trade, and as such are usually registered for business rates (BR) rather than council tax (CT), enjoying advantageous treatment over normal residential lettings.
The new rules are in response to perceived abuse in some areas, where owners of properties with substantial private use were claiming business usage based on very limited commercial lettings. However, rather than simply applying existing FHL rules to the business rating system, a new set of criteria has been introduced, which is sufficiently different to that which applies for Income Tax purposes that some properties may well comply with one set of rules but not the other.
For example, the rating rules are based on nights of occupation rather than days (i.e. a property let out from Friday evening to Sunday morning would have been let for two nights for the purposes of meeting the business rates definition, but three days for income tax purposes). Moreover, rating decisions will be based on a 31st March period rather than 5th April so there is a further mismatch, particularly if Easter falls over that period.
There is also a difference in terms of the occupation periods, with rating decisions based on an availability of 140 nights, and actual lettings of 70 nights, compared with the qualifying criteria for FHLs of 210 days availability and lettings of 105 days. However, this is not as generous as it sounds, since the special allowances for FHLs such as averaging and “days of grace” do not apply for rating purposes. This effectively means there is no recognition of fluctuations according to the weather, repair cycles or even the timing of Easter each year. (Easter falls at the end of March / start of April so worth checking you will not get caught out in the 2023/24 year. Easter Sunday on 31 March this year).
Where there are multiple cottages with different letting profiles, such as in the case of converted outbuildings on a farm, it is quite possible that some will fail the occupation test for rating purposes whilst the whole block will qualify as FHLs because on average they met the letting conditions.
The rating occupation periods will also be based on the current and previous years of usage, whereas FHLs are effectively self-assessed at the end of each tax year. The transition will be enabled by way of questionnaires sent out by rating authorities during the 2023/4 financial year, but taking effect from 1st April 2023, “to check that the eligibility rules for self-catering properties are met”. Failure to return the form or completing it incorrectly could lead to a financial penalty or even prosecution.
It is a complete mystery why we need two sets of measurement to identify the same objective. The complexity of the new procedures and the overlap with the familiar Income Tax rules are likely to lead to considerable confusion. Clients receiving this questionnaire are advised to get in touch to confirm their position and avoid accidental misdeclarations before returning it.