Clause 52 - Furnished holiday lettings

Finance (No. 3) Bill – in a Public Bill Committee at 12:30 pm on 7th June 2011.

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Question proposed, That the clause stand part of the Bill.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I want a short debate on the principles of clause 52 and the accompanying schedule 14, and some of the comments that have been made on them. They make three changes to the special rules for the tax treatment of income from the commercial letting of furnished holiday accommodation. They extend the rules, restrict tax relief for losses, and tighten qualifying criteria.

The first change extends the special rules to the letting of property outside the UK but in the European economic area. The second change removes income tax relief for losses against general income and terminal losses, and removes corporation tax relief for losses  against total profits. The third change extends the length of the periods for which the accommodation must be available to be let, and is actually let if it is to qualify as holiday accommodation. The first and second changes take effect from the 2011-12 income tax year, and for corporation tax beginning on or after 1 April 2011. The third change takes effect for income tax from 2012-13 and for corporation tax on or after 1 April 2011.

The Minister will know that those proposals caused some discussion prior to the election when they were proposed by the then Labour Government, and that some changes have accordingly been made. I should like some clarity from the Minister on a number of areas that are still a cause for concern.

As we know, clause 52 covers the changes on how aspects of income and gains from furnished holiday lettings will be taxed. A property letting qualifies as a furnished holiday letting if it passes a series of tests outlined in the legislation, such as the number of days it is let out for and the time it is available to let.

I have had a number of fair representations from the Chartered Institute of Taxation relating to the available-for-let test. The current proposal is to increase the test from 140 days to 200 days a year, which could create some difficulties for some businesses that operate furnished holiday lettings—in particular, where planning or other conditions attached to a property restrict the periods during which a property can be occupied.

The CIOT makes the strong point that the let test increase from 70 to 105 days will be problematic in some parts of the United Kingdom. My hon. Friend the Member for Edinburgh South and the hon. Member for East Antrim—if he was here—will be interested in this issue because the length of the days in the far north of the country means that the tourist season in both Scotland and Northern Ireland is very short, so dealing with that higher let-out day count from 70 to 105 days will be difficult.

I could have tabled an amendment that covered those particular issues, but I thought that it would be better to test out the Minister in our clause stand part discussions. Can he assure me that he has considered the issue in detail and that he is satisfied that the let test from 70 to 105 days will not adversely affect those distant parts of the United Kingdom, such as Scotland and Northern Ireland, where the tourist season is particularly short? Do the Government intend to keep the qualifying period under review in the light of the effect that these changes might have on some of the more remote tourist areas in the United Kingdom?

The old test of 70 days was roughly equal to the UK holiday letting season, and the 105 days might be more difficult to achieve. The new rules will also extend to countries in the EEA. What assessment has the Treasury made of the specific cost to the Exchequer of extending the plans to countries outside the UK? These points are worthy of a response from the Minister because they have been raised before and are still a matter of some concern.

There have also been discussions on the uncertainty among taxpayers on the distinction between a trading business and a rental business such as a furnished holiday letting. I would welcome some clarity from the Minister on the boundary between self-catering accommodation, bed-and-breakfast and budget hotels, because it is difficult to determine.

What comment does the Minister have on the representations that have been made by the Institute of Chartered Accountants in England and Wales that the distinction based on whether a furnished holiday letting owner lives on site and therefore is in occupation is based on established case law? Such an interpretation is not widely applied. The Minister needs to address this lack of clarity over the distinction and the lack of guidance from HMRC.

One of the issues that the CIOT has put to me about this particular clause is that there should be, as part of the review of small business taxation, some clarification of the boundary between those who operate trading businesses and rental businesses to provide greater certainty for taxpayers. It has also asked how and when the impact of these changes will be felt. In particular, it is referring to the economic impact on the recovery. Is the Minister likely to review this policy at any time? Will he look at this on an annual basis? Is this now set in stone for the period of the clause? What assessment would he make of the fragile potential tourist industry and the impact of these changes?

The definition of furnished holiday letting is based on the number of letting days and it could be argued that that is a blunt instrument because the number of letting days varies in different parts of the United Kingdom. Is there any assessment of having a different letting day period for different areas? I know that is difficult but the Minister will be aware that Northern Ireland, the north of Scotland, west Wales, west Cornwall and the Scilly Isles have different lengths of tourist season from other parts of the UK where there are furnished holiday lets.

Those few comments reflect the points that have been put to me and I wonder whether the Minister can satisfy those outside the House who have concerns.

Photo of David Gauke David Gauke The Exchequer Secretary 12:45 pm, 7th June 2011

Clause 52 makes changes to the furnished holiday lettings regime in a way that is fair to UK businesses. It supports the Government’s objective of maintaining a competitive and stable tax system that is compliant with European law. To that end, current legislation on furnished holiday lettings will be amended to ensure that the tax treatment of those with furnished holiday letting properties within the European economic area is the same as the tax treatment of those with furnished holiday lettings properties within the UK; to support the role of the tourism industry in the UK economy and the employment and enterprise it provides; and to ensure that the tax rules for furnished holiday lettings are appropriately targeted, affordable and provide value for money.

The furnished holiday lettings rules allowed beneficial tax treatment to UK property businesses, but not to those in the EU. That may not have been compatible with EU law, so the previous Government announced in 2009 that they would abolish the regime after a temporary extension to the EEA. It is worth putting this debate in some kind of context, because the plans that we inherited would have abolished the furnished holiday lettings treatment for all businesses, regardless of days of availability of letting. As part of the wash-up before the election, we negotiated the removal of the clause abolishing the regime. To have pressed ahead  would have had an adverse effect on UK businesses and the UK tourism industry. Instead, we committed in the coalition agreement and the June Budget to finding a path that would retain the rules, consulting the industry to ensure that the solution was workable, fair and fiscally responsible.

The changes made by schedule 14 will affect around 65,000 businesses, most of which are run by individuals. The existing furnished holiday lettings legislation applies to properties that are used to provide commercial furnished holiday lettings. Income from such lettings is technically property income—the old schedule A for those who remember these things. But the income qualifies for certain specified tax treatments for trades: enhanced capital allowances, sideways loss relief, certain capital gains reliefs and pensionable relevant UK earnings. To qualify for that tax treatment, the business must be carried on commercially, and with a view to a profit, and pass certain other tests. Two of the tests concern periods of availability to let at 140 days and actual lettings of 70 days per year.

To ensure that the extension of the relief to the EEA is affordable, changes to the legislation are being made to target the tax allowances at businesses run on a truly commercial basis. Such commercial businesses support the UK tourism industry and the economy. Accordingly, we have retained the reliefs related to capital allowances, capital gains and pension advantages as these are most beneficial to commercial businesses. However, the provision for sideways loss relief has been removed. In addition, to reflect the modern extended holiday season, the period for which a property is required to be available is increased to 210 days and that for which it is actually let to 105 days.

As part of our consultation during the autumn, the Government acknowledged the possible obligation to extend the regime to EEA properties. Accordingly, the consultation proposed to change the qualifying conditions and limit some of the tax advantages to offset the additional cost to the Exchequer of the extension. At the same time properties let as commercial businesses would continue to benefit from favourable treatment.

A number of comments were made during the consultation and we tried, wherever possible, to accommodate them. First, some respondents were concerned that the increase in the thresholds for qualifying days would be difficult to meet. The original proposal was changed to allow a period of up to two years when the need to meet the actually let threshold could be waived, providing there was a genuine intention to let. Additionally, the Government have decided to delay the introduction of the threshold change by a year to help businesses adapt to the new requirements. Secondly, some respondents were concerned that the new thresholds would have a negative impact on more remote letting, especially in Scotland—a point raised by the right hon. Gentleman.

It may be more difficult for certain outlying areas to meet the tests every year, but the new period of grace should go a long way to help those businesses meet the tests. We do not believe that we can introduce differential thresholds. That would raise state aid difficulties. The new thresholds were those that we were advised by the main interest group would reflect a level attainable  by properly commercial businesses. We have consulted extensively, as I said, but received no proposals on geographical or seasonal definitions, which would allow thresholds to be varied in a way that meets policy objectives and legal requirements.

The Government recognise that remote locations face particular challenges. They also have particular attractions. The Government encourage people in remote locations to find innovative ways of exploiting their advantages and overcoming their obstacles so as to meet new occupancy thresholds. The period of grace is designed to help businesses that fail to meet the occupancy threshold for up to two years. Therefore, a business needs to meet the thresholds for only one year, not three. The introduction of the increased thresholds has been delayed by a year to allow businesses to adapt their letting strategies. Those should be particularly helpful to regions where the new rules may be more challenging.

In response to the consultation, some respondents regretted the removal of sideways loss relief, especially in the early years, but the package should be viewed as a whole. Although loss relief is restricted, beneficial capital allowances and capital gains treatments have been retained.

The right hon. Member for Delyn asked how much it cost to extend the revised rules to the EEA. Extending the regime to EEA states and reversing the repeal of the furnished holiday lettings rules is estimated to cost the Exchequer £20 million in 2011-12. However, the changes made by the Bill will rapidly reduce the costs going forward, as the restrictions to loss relief and the increase in the thresholds feed through. It is anticipated that there will be decreased yield from chargeable gains in the longer term, but insufficient information is held to produce a robust estimate of that decrease.

The right hon. Gentleman asked about the distinction between furnished holiday lettings and, for example, bed and breakfasts and hotels and so on. The distinction depends on whether the business is a trade or property business. Furnished holiday lettings are actually property rental businesses that are treated as trades for certain tax purposes. The activities performed by the proprietor do not amount to a trade. However, if the proprietor provides significant services—for example, meals—the business may be a trade, in which case it would enjoy all the trade tax benefits. The status of the business will depend on the individual facts of the case.

The right hon. Gentleman asked whether there is an intention to review the issue. There is no intention for a formal review but, as he will be aware, all taxes are reviewed from time to time. We do not have any intention at this point of reopening this particular area. We believe that the retention of the furnished holiday lettings regime has been widely appreciated by the tourism industry. The changes to rules will provide for EU-compliant legislation in a targeted and cost-effective way. We have a good compromise, which protects revenue but maintains the furnished holiday lettings regime that the previous Government sought to remove. We believe that it serves a valuable purpose and we are pleased to have been able to continue in this targeted way.

Question put and agreed to.

Clause 52 accordingly ordered to stand part of the Bill.

Schedule 14 agreed to.