Government's latest FHL consultation published 27 July

[WASCO]

The Government's latest FHL consultation paper has just been published (27-July) and can be downloaded at: www.hm-treasury.gov.uk/consult_holiday_lettings.htm

Subject of this consultation:

Proposed changes to the special tax rules for furnished holiday lettings.

Scope of the consultation:

The consultation is on proposals to ensure the tax rules for furnished holiday lettings are fully compliant with EU law and are better targeted at businesses that are run commercially for profit rather than for personal use.

The proposals are to:

• increase the minimum period over which a qualifying property is available to let to the public during a year from 140 to 210 days;

• increase the minimum period over which a qualifying property is actually let to the public during a year from 70 days to 105 days;

• restrict the use of loss relief from furnished holiday lettings so it can only be set against certain income from the same business.

• a loss from a UK qualifying furnished holiday lettings business should only be available to set against future profits from that UK qualifying furnished holiday lettings business.

• a loss from an EEA qualifying furnished holiday lettings business should only be available to set against future profits from that EEA qualifying furnished holiday lettings business.

The consultation seeks views on the impacts of these proposals, and is an opportunity to influence the detailed policy implementation.

Impact assessment:

The consultation stage impact assessment is at Annex B to the document.

Duration:

The consultation runs from 27 July to 22 October 2010.

After the consultation:

The Government will publish its response by the end of the year and intends to implement the changes in the 2011 Budget.

[goosie]

thank you - will look at this in detail and comment accordingly

[greenbarn]

I've had a read through and from my understanding so far it seems to be quite positive, and certainly a huge leap in simple common sense from former President Gordon's mob.

The fact that it seems positive almost certainly means I'm missing something, and I'll await a view from John Endacott of Winterrule (currently on holiday apparently) who has so far given far more insight and campaign effort to the issue than some of our "official" representative bodies (one of whom has yet to mention anything, the only sign being a duplicate post on their forum from WASCO - so thanks to WASCO for giving the heads up).

It looks as though those owners who are trading seriously will be in much the same position as they are under current rules, whilst those who are not trading seriously will (quite rightly in my view) lose any tax advantages - advantages which are quite likely to be the only reason they are offering holiday rentals. Only allowing losses to be offset against the income from the rental business seems far more realistic than allowing them to be offset against other income.

The only thing nagging away in the back of my mind is how likely it is that we'll see ridiculously low rates from the "non-serious" in an attempt to up the number of weeks they let - rates with which the rest of us won't be able to compete.

One to ponder.

[Windy]

I agree GB - for those of us trading seriously the impact will be negligible, although the loss of the ability to offset losses against other tax liabilities would cost me if I bought another lodge (or maybe I'd just have to rephase my capital allowance claims)

There's some "interesting" stuff about what happens if you fail to qualify for a year too. Well, when I say "interesting" I mean it's interesting to see that the consequences of the tightening up of the rules potentially means enacting a huge amount of complex legislation to cope with the impact on capital allowances of an owner failing to qualify one year but doing so the previous and next.

[greenbarn]

Windy - your point on the complexities involved if a business fails to qualify in one year seems to be something that Government are aware of, and looking for some suggested solutions. (Now there's a sentence I couldn't have written last year!) They seem to accept - suggest even - that the idea that if you don't qualify you effectively have to show a disposal of all the relevant plant and machinery, only to buy it back again the following year (or something like that) is unworkable. After that it starts to look like a means of financing your accountant's new BMW.

One very pertinent example has already been raised by EASCO, which is the situation where considerable business could be lost in one year due to flooding, F&M or other natural disasters.

[WASCO]

According to the VOA (27-Jul-10), if the proposed changes to the FHL rules go through they "would not affect the approach for [business] rating which is governed by s66 of the Local Government Finance Act, 1988. It would be up to Communities and Local Government/WAG to change s66 to correspond with this if they consider it to be required".

[seasideholidaylets]

Hi all, first post so be gentle!!

Good info about the new rules here...

http://www.accountingweb.co.uk/topic/ta ... eze/443534

[Windy]

Just received this useful precis from Winterrule

Dear all

The new coalition government have dispensed with the pre-budget report which was a feature of the labour government years. The new regime is to publish draft legislation in December which will then be comprised in the finance bill the following year. This year the draft legislation has included the proposed new rules on furnished holiday letting.

We had been pushing for a further meeting with H M Treasury and H M Revenue & Customs (HMRC) centrally to discuss the government’s proposals for the furnished holiday letting industry and with the publication of the draft legislation in mind, a meeting was arranged for last week to discuss the new proposals. I attended that meeting and this email is intended to summarise the current position and my thoughts on the future outlook for the self catering accommodation industry.

Latest Developments

The government had proposed in the June budget that the special furnished holiday letting rules would be retained but with a more restrictive qualification limit in terms of the number of weeks that a property had to be both available for letting and actually let and also with a restriction on the availability of loss relief. These rules were put out to consultation. Despite a very high number of responses to the consultation objecting to the new proposals, the government has confirmed that it intends to revise the rules on the basis of the June budget announcements. However the good news is that we have achieved some further concessions. There is also an ongoing period of further consultation until 9 February 2011 and so any business that is particularly adversely affected should consider making further representations.

The draft legislation and accompanying notes which were published on 9 December 2010 are available on the Winter Rule website at http://www.winterrule.co.uk/rural-tax-campaign/. From this you will see that a property must be available for 210 days in a year and actually let for 105 days in a year. These will be challenging targets for certain parts of the country especially Northern Ireland, parts of Scotland and west Wales and west Cornwall. It is possible that planning restrictions may prevent certain properties from meeting the 210 day requirement and if you are affected by this then it would be useful to hear from you so that further representations may be made to the government on that point.

Period of Grace

The major concessions that have been achieved in the further consultation is a delay in the introduction of the new tighter day count limits so that these only commence from April 2012 and a further concession has been a new two year period of grace limit which enables a business to continue to qualify where it has already qualified. This is to prevent too many holiday letting businesses which are close to the day count limit drifting in and out of the limits from one year to another and so causing a large number of administrative problems for both the taxpayer and HMRC.

The particular good news here is that as long as a business meets the current limits for the coming tax year (2011/12) then it will continue to qualify for the following two years after the new limits have been introduced as long as the property is available for 210 days in each of the following two year and there is “a genuine intention to meet the letting condition”.

This means that for existing furnished holiday letting businesses that already qualify there is effectively a three year period before the new rules bite and it will not be until April 2014 that businesses have to meet the 105 day letting condition. This means there is plenty of time for businesses to plan as to how to adapt to the new rules and one must also hope that there is a recovery from the current economic conditions during that time such that higher occupancy levels are a more reasonable expectation.

Use of Losses

The intended changes to the furnished holiday letting rules will make the legislation even more complex to interpret and understand and furnished holiday letting will occupy an even more unusual position in the tax legislation.

Historically it has been treated as property income albeit with certain enhanced trading reliefs. However as far as losses are concerned then in future these will be treated as purely a trading loss and it is important that this point is understood to avoid confusion of the use of such losses. What the government is then imposing is a very restrictive regime for those trading losses such that they can only be used against future profits from the same furnished holiday letting trade.

So, if a furnished holiday letting unit is started up and losses are incurred then those losses will only be available to be utilised against future profits from that same business. This is likely to mean that it takes a very long time to get tax relief on start up losses. Further, should the business start as a furnished holiday let and then cease to be a holiday let and become an assured shorthold tenancy let then any losses incurred whilst a furnished holiday let will not be available against the rental income then being generated from the property. The point is that for these purposes furnished holiday letting is not being treated as rental income but as a trading activity. Should that property then be let again as a furnished holiday let by the same owner then the furnished holiday letting losses should be available against future income from it as a furnished holiday let.

In case the point is not yet clear enough, for someone that has a number of let properties and who then has a furnished holiday let with a loss, then the loss is not available to be offset against the rental income from the other properties. It is an entirely separate activity.

One important planning point for individuals with other let properties is that where they wish to refurbish a property which will then be let as a furnished holiday let it may actually be better to refurbish it as an assured shorthold tenancy and let it on that basis first of all before then using it as a furnished holiday let. Very careful planning will be required over utilisation of losses in future.

Guidance from HMRC

We have been promised further guidance from HMRC but this will not be prepared until after the consultation period closes on 9 February 2011. In particular it is hoped that the draft guidance previously issued with regard to complexes where the owners live on site will be formally issued. This should then confirm the point that those complexes should more properly be treated as trading activities and so not come within the furnished holiday letting rules. This will however mean that such income is subject to national insurance. However that approach is likely to be a benefit to those complexes and individuals in that position should take advice on their position.

Outlook for the Furnished Holiday Letting Industry

I believe that over time these revised rules will lead to some significant changes in the furnished holiday letting industry. The Treasury continues to have no detailed research to back up the rule changes but they do expect a reduction in the number of furnished holiday letting units. However these are expected to be units that are on the fringes of qualifying and so are not expected to significantly reduce capacity.

Building on this, there are some reasonable assumptions that can be made about a possible future for the industry over both new starts and consolidation.

The restriction to loss relief will provide a barrier to new start furnished holiday let units. There will have to be an expectation of good future profits flowing from a unit and even then pricing will be very important in the first year to ensure that the 105 day occupancy limit is achieved. As long as that is achieved then the two year period of grace will provide some relief for continuing to build up the business over the next two years. However it is hard to see that there will be many individuals that will want to spend large sums of money on introducing new high standard furnished holiday let units where there is no history of previously letting the property. This is likely to boost the value of existing holiday let units.

Following on from this, the existing averaging relief for owners with several furnished holiday let units and the fact that there would be existing furnished holiday let income that is available to utilise losses against is likely to mean that there will be consolidation in the industry and that there will be more owners with greater numbers of furnished holiday letting units. The greatest barrier to this is likely to be the VAT threshold but there are economies of scale to be achieved. Time will tell but high investment into single unit furnished holiday lets does not look like a good business model.

We will continue to include details on our website on our dedicated webpage and I will provide a further update when we have more details on the proposed new guidance.

Merry Christmas.

Tax Campaign

This email was sent for and on behalf of Winter Rule LLP

[greenbarn]

Windy, you beat me to it. Considerable thanks are due to Winterrule for producing something that is in-depth yet understandable, and for their campaign efforts to date.

It's absolutely essential reading for anyone considering going into business as a start-up holiday let!