Business rating of holiday cottages – a diversification headache

One of the most common forms of diversification on the family farms, particularly in “tourist” areas, is the conversion of redundant outbuildings or cottages into furnished holiday lets (FHLs). Lettings, which meet conditions regarding availability and occupation are, for income tax and capital gains tax purposes, treated as if they were a trade, and as such enjoy advantageous treatment over normal residential lettings.

According to MHA agricultural partner Joe Spencer, life may shortly become more difficult for these businesses. For some time it has been advantageous for owners of such properties to register them for business rates (BR) rather than council tax (CT) which is logical given their usage. However, there was a perceived abuse in some areas, where owners of properties with substantial private use were claiming business usage on the basis of very limited commercial lettings – accordingly, following an announcement in the Autumn Statement, new conditions for business ratings were announced.

However rather than simply copying the existing FHL rules across to the business rating system, a new set of criteria has been implemented which will not only limit abuse (probably fairly minimal on a farm cottage) but also make life much more difficult for many genuine businesses. The new rules are sufficiently different to those applying 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 (so for example 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 31^st March period rather than 5th April so there is a further mismatch, particularly if Easter falls over that period.

Here 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 210 days and 105 days for FHLs. However, this is less generous than it sounds, since the special allowances for FHLs such as averaging and “days of grace” do not apply for rating purposes. There will effectively therefore be no recognition that businesses do not have the same circumstances every year and can fluctuate according to weather, repair cycles or simply the timing of Easter. Where there are multiple cottages with different letting profiles, 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 2023/4 but taking effect from 1^st April 2023, “to check that the eligibility rules for self-catering properties are met”. Failure to return the form or completing it incorrectly can lead to a financial penalty or even prosecution”.

According to Joe Spencer, the complexity of the new procedures and the overlap with the familiar Income Tax rules are likely to lead to considerable confusion. “I can see clients receiving this questionnaire and thinking that since they comply for Income Tax, they will be ok to stay on a business rates basis, not realising the rules are different. It is a complete mystery why we need two sets of measurement to identify the same objective” I fear there will be many accidental misdeclarations, and it is likely to be a further disincentive to diversification. I think anyone receiving a questionnaire should check with their accountant before returning it”