Author: Matthew Jeffery, Tax Director
Following a consultation process including businesses, the tourism industry and local communities, The Welsh Government recently announced new tax rules for second homes and self-catering accommodation. Namely, introducing new powers to increase the maximum premium that can be levied on council tax for second homeowners and a change to the criteria for self-catering accommodation (holiday lets) to qualify for business rates.
The new rules will not be welcomed by independent holiday let owners in Wales, who have already suffered with the impact that Covid has had on hospitality businesses all over the UK.
Zeal Tax Director, Matthew Jeffery, has reviewed the limited information published on the changes and the existing legislation. Some background on the current rules and a summary of the key changes for self-catering holiday let owners are outlined in this article.
The rise of second homes and holiday let properties in many Welsh communities has been a topic of much debate in recent years. Particularly since the rise in online booking platforms and the change in habits and trends of tourists, now desiring private holiday accommodation rather than a traditional Hotel or B&B. As a result, the demand for houses in certain areas has increased significantly, pushing up prices and preventing some locals from being able to purchase a home in the place they have grown up.
The Welsh Government have attempted to address the issues of second homes by allowing Local Councils to apply a levy on council tax for second homes. From 2017, this was increased to 100% of the standard rate of council tax and second homes were no longer exempt. In 2020, there were more than 23,000 properties that there were subject to a council tax levy.
From 2010, properties that were let commercially as self-catering accommodation in Wales, could register for business rates instead of council tax. For many properties, this meant no council tax or business rates were payable (claiming small business rates relief).
Increased council tax premiums
From 1 April 2023, the maximum level at which local authorities can set council tax premiums on second homes and long-term empty properties will be increased to 300%. For example, the average council tax charge rate for a property in Pembrokeshire would rise from £2,000 to £8,000 (an increase of £6,000).
These new rules will enable Councils to decide the level which is appropriate for their individual local circumstances. The premium can be set at any level up to the maximum and they will be able to apply different premiums to second homes and long-term empty dwellings.
The new measures are specifically targeted at owners of second homes, rather than holiday let owners. However, what impact a 3 fold rise in council tax payments will have on second home owners is unknown. Will they be forced to sell up, start letting regularly or occasionally as a holiday let (a few weeks rental could pay the extra tax) or will they just pay the premium?
The losers are likely to be holiday let owners who may no longer be able to meet the existing, let alone the enhanced criteria to qualify for small business rates relief (for example they live at the property for extended periods during the year or simply can’t get the minimum bookings required per year). The new council tax premium would have a significant impact on business profits and the future viability of letting or even retaining the property.
There will also be financial impact for owners of multiple holiday lets, who may have chosen to pay council tax as the benefits of business rates status diminishes with multiple properties. The rise in council tax premiums would have a major impact on business profits.
For holiday let owners that regularly let their property on a commercial basis and obtain business rates relief, the council tax changes should not impact them. However, if the new criteria is not met, the council tax premiums would result in unwanted tax bills!
New business rates rules for self-catering properties
From 1 April 2010, The Welsh Government announced that qualifying self-catering properties are non-domestic and therefore liable for non-domestic rates, if the property is ‘let commercially’ for short periods and the following criteria are satisfied:
|Criteria||Now||From 1 April 2023|
|Will be available for let in the next 12 months||140 days+||252 days+|
|Was available for let in that 12 month period||140 days+||252 days+|
|Actually let during that period||70 days+||182 days+|
Note – businesses consisting of several self-catering properties at the same location or within very close proximity have the option to average the number of letting days of the properties to meet the 70/182 day criteria, where they are let by the same or connected businesses.
The new criteria represents a significant rise, requiring self-catering owners to ensure their property is available for letting for an additional 112 days a year (80% rise) and actually let for 182 days, an increase of 260%!
It does not, however, seem to be their intention to reduce the supply of genuine holiday accommodation.
This will be true for owners whose properties are run commercially and continuously available for let (subject to some private use). Concerns will, however, arise with the 182 days that properties will actually need to be let, given owners have little control over the number of bookings they receive or external factors outside of their control (e.g. flooding or Covid).
“The changes are intended to provide a clearer demonstration that the properties concerned are being let regularly as part of genuine holiday accommodation businesses, making a substantial contribution to the local economies”.The Welsh Government
As with any new rules and legislation, they pose a wealth of questions. Zeal have attempted to pre-empt potential questions and provide some answers below.
How will I need to prove the letting days conditions?
The Valuation Office Agency (VOA) are responsible for policing business rates in the UK. It is the ratepayers responsibility to retain all information in support of their claim to business rates. Examples of information will include financial accounts of your business, your marketing of the property, or evidence of lettings such as a guest book or calendar bookings.
The VOA have the power to request information to support claims for business rates status and will issue a form called ‘Requests for Information’ VO6048. This has been designed specifically for self-catering units and holiday cottages and can be sent to you at any time.
The VOA will be checking to see if you have met the commerciality condition and letting days criteria. Be aware, letting to friends or family at under market value may not count towards letting days.
If you receive a VO6048 form, don’t ignore it. Failure to respond or providing incorrect information can result in penalties of up to £1,000. Your non-domestic status will also be automatically removed. In addition, if you can’t prove you have met the letting conditions, the VOA will back date Council tax banding and potentially issue a penalty.
What does being ‘let commercially’ mean?
The definition in the legislation of let commercially is ‘on a commercial basis, and with a view to the realisation of profits’.
To fall within the definition will usually mean the property being let at market rates and actively advertised. For example using holiday cottage websites, estate agents, tourist board, Visit Wales web pages etc.
It is recognised that reduced low season price lettings may produce little or no profit but this letting may still be treated as commercial depending on the specific circumstances. For example, the receipts could help towards the cost of maintaining the property during quieter periods. On the other hand, lettings to friends or relatives at zero or nominal rents are not likely to be considered commercial and should not be taken into account when applying the commercial basis test.
It is for the ratepayer to demonstrate to the satisfaction of the VOA that the property has met the necessary criteria to be classed as non-domestic property. Making a profit would not be essential to showing commerciality. Other factors could be taken into account, for example building repair/maintenance, business set up costs etc.
When I can I register for business rates on my property?
New holiday lets will not automatically qualify for business rates and will need to be pay council tax initially. Once the property has been commercially available to let for 140 /252 days and actually let for 70/182 days, business rates can be applied for from the latest of those dates.
What happens if my property does not meet the criteria or stops being used for self catering accommodation?
The premises would be assessed as domestic and therefore revert to council tax for rating purposes and will be assessed accordingly.
It is the ratepayers’ responsibility to notify the VOA if there has been a change of circumstances that prevent the property meeting the letting criteria. Failure to do so could result in a large backdated council tax bill.
What if my property does not meet the criteria due to exceptional circumstances?
If your property is unavailable to let for 140 days (252 from April 2023) or not actually let for 70 days (182 from April 2023) due to adverse or unforeseen circumstances, such as flooding, which has resulted in damage to the building, this would still result in your property being reclassed as domestic and therefore subject to an assessment for council tax. There is no official period of grace.
In this scenario, if the property was reclassified as domestic, there are exemptions and discounts available in relation to council tax. A property needing major repair work can be exempt from Council Tax for up to 12 months or, if a property has been empty for up to six months. Note, that properties need to be ‘substantially’ unfurnished to obtain the reliefs. You may need to remove some furniture is you apply!
Unfortunately, there is no guidance on exceptional circumstances such as ill health of the property owner or Covid 19 lockdowns. There are, however, discretionary powers available to Councils to award hardship relief in respect of council tax liabilities. You should contact the VOA or your Local Authority who can advise if you are eligible for any council tax exemptions, discount or discretionary relief.
If your property comes back into use as a self-catering let and you can provide evidence to support 140/252 days available to let and 70/182 days of actual lettings in the previous 12 months, then you can apply to the Valuation Office Agency to be re-assessed for non-domestic rating purposes.
What if a holiday let is part of our main residence or an outbuilding annexe to a main residence?
It is unclear whether the council tax premiums may be charged to properties that have a holiday let annex to the main residence. We have contacted the Wales Tax Policy Office for guidance on this scenario.
If a property only has planning for a holiday let, can council tax rules apply?
If you fail to meet the letting criteria, you can still be rated for council tax as a domestic property. Planning and Local Taxation regimes operate completely independently of each.
If you have any questions on how the new rules may impact you or you need assistance with what you need to report, contact the Valuations Office Agency on 03000 505505 or at www.gov.uk/contact-voa
More bad news on the way for Welsh Tourism?
It has recently been announced that The Welsh Government has confirmed a consultation on proposals for a local visitor levy will recommence in Autumn 2022.
The proposed tourism tax was first raised in 2018, but paused by Covid in 2020. The aim being ‘for visitors to make an investment in local infrastructure and services, which in turn make tourism a success’.
Zeal will contribute to the consultation progress and will provide further information as it arises.
Zeal are an independent tax consultancy and the first capital allowances tax and surveying specialists based in Wales.
The technical advisors at Zeal are members of the Chartered Institute of Taxation and have a wealth of knowledge and experience in specialist tax matters. Zeal find better ways for more businesses to benefit from available tax reliefs, untapped savings and efficient business structures.
As experts in helping owners of holiday lets claim hidden tax relief in their properties, which most have no idea they are entitled to, Zeal could help you unlock thousands of pounds in tax and cash savings.
Zeal offer a free consultation and property survey to assess if you qualify and identify the full value of your claim. There are also no upfront costs and our fee is only payable if your claim is successful.
Get in touch with a member of the team to see if we can help you save tax on your holiday let business!