.png)
.png)
KEY POINTS
- Will the furnished holiday lettings rules be repealed or amended?
- A review of the decisions in three important cases.
- The factors that determine whether a trade is being carried on.
- The property rights and services provided.
- Should the letting activity be redesignated as a trade?
A little over a year ago, I was happily minding my own business when I was surprised to discover in the Budget that the special rules for furnished holiday lettings contained in ITTOIA 2005, Part 3 Ch 6 were to be abolished. 
I was not alone in being caught out by this announcement and it has been something of a cause célèbre since. In the period since the announcement, I have spent a considerable amount of time on this topic and have had reason to revisit a number of routine matters of practice and everyday assumptions.
The result is a greater appreciation of the tax rules on the distinction between trading and income from land and property and a realisation that this issue goes far beyond the simple matter of the potential repeal of the furnished holiday letting rules.
The outcome of the proposed repeal of these rules is still unclear, although an announcement is expected as part of the Budget on 22 June 2010. Given that the repeal provisions were dropped from the Finance Bill prior to the dissolution of the last Parliament then it is to be expected that the coalition Government will not reintroduce the provisions as originally announced.
Instead, the most likely outcome is a retention of the existing rules, but with an increase in the 140 and 70 day limits in ITTOIA 2005, s 325(2) and s 325(3) respectively together with a restriction of the existing tax reliefs.
This is in line with the comments made by George Osborne prior to the election. There was certainly an implication that tax relief for interest on borrowings could be restricted and we are already expecting a restriction of capital allowances in any event.
Is there a trade?
However, even if the existing rules survive largely unchanged, for some operators there is still an element of the genie having been let out of the bottle whatever the outcome.
The reason for this is that in many cases where I had understood that the furnished holiday letting rules applied it now appears, in fact, that a trade may be being carried on in accordance with case law. I hasten to add that I do not believe that I was alone in my previous assumptions.
I did consider the existing furnished holiday lettings provisions in The end of the holiday in which I covered the lead case on furnished holiday letting of Gittos v Barclay [1982] STC 390.
In that High Court case, Justice Goulding concluded that the taxpayer’s activities in the letting of two Cornish properties ‘were not significant enough to make her a trader and not a mere landowner who derived an income by exploiting her property’. So, is that the final word on the case law on the subject? Well no, not really.
The Rotunda Hospital case
There are three cases that are worth considering further and the first one relates to a charitable maternity hospital in Dublin and the letting of the Rotunda Rooms prior to the First World War.
The Rotunda Rooms were constructed in the late eighteenth century to provide an income for the hospital to cover maintenance costs, etc.
The building was connected with the hospital by an internal passage and the rooms were let by the hospital charity for entertainments, concerts, cinema shows and the like. The letting periods varied from one night to up to six months and the letting price included the use of seating and heating.
Further charges were made for gas and electric light based on the usage shown by the respective meters. A substantial income was derived from this activity.
The case proceeded through the Special Commissioners, the Irish High Court and then the Irish Court of Appeal until it eventually reached the House of Lords.
While the Special Commissioners found that the activity amounted to a trade, the High Court and the Court of Appeal both held that the income was that from land and property.
And at first sight, I have to say that it seems surprising that this income could be anything other than income from land and property.
However, the House of Lords held that it was income from trading. Why?
In giving judgment, the Lord Chancellor stated that the hospital ‘retained control of the premises, select the persons to whom the user is granted and regulate the conduct and behaviour of the persons allowed to resort thereto, and, for the purposes of enabling or facilitating the making of contract for such user, they have properly fitted up the Rotunda Rooms with fixtures, fittings and other things – some at least being clearly chattels – and provide attendance and other services’.
So there are two crucial deciding points that come out of this:
- the retention of control of the premises; and
- the provision of services.
These are the points to look out for in establishing whether the property is being exploited in the course of a trade or whether another person is being allowed unfettered use of the property.
But given that this case is over 90 years old then how has this principle developed since?
The Salisbury House case
A decade later there was another significant case which touched on this issue. Salisbury House Estate Limited v Fry (1930) 15 TC 266 is a well-known case involving the owner of a large office block let to tenants as unfurnished offices.
The company had no other business except the letting out and management of the one property. The company maintained a sizable staff to manage the property and undertook all the usual management services.
The property consisted of 800 unfurnished rooms let out to some 200 tenants with 78 leases for periods ranging from 2 to 21 years together with 89 tenancy agreements and 26 informal tenancies.
But while the scale was large, it was still only letting income.
So in the Salisbury House case, although the owner was clearly in occupation of the property in terms of the common parts, it gave clear property rights to the tenants for their individual offices and the services were no more than one would expect from a landlord being manager of the common areas.
This case picks up the oft-quoted cry of buy-to-let landlords with large portfolios of properties who try to maintain that they are trading.
Indeed, in discussing the proposed repeal of the furnished holiday letting rules with the government officials, it is apparent that there is a desire by some to try to level out the playing field (as they see it) between holiday accommodation providers and buy-to-let landlords. But, the key point is that – in itself – size does not matter.
A more recent case
Roll on another 50 years and in the period of uncertainty prior to the introduction to special rules for furnished holiday letting, there was the Gittos v Barclay case, but also another significant case in the form of Griffiths v Jackson [1983] STC184.
This was a High Court case, again from the West Country, involving the letting of furnished accommodation mainly to students in Bristol. While the General Commissioners determined that the profits derived from a trade, the High Court held that it amounted to land and property income.
Although there was a substantial level of activity involving 11 properties, there was no significant provision of other services with these being limited to some laundry and linen services and arrangements for cleaning of rooms and gardening.
Food and car hire could be provided on request. Again, this all looks very much like land and property income.
However, what is particularly interesting about this case is that it draws out the key distinction between the Rotunda Hospital case and the position in Salisbury House (both of which were cited in the case).
The taxpayers in this case tried to argue that their position was no different from that of an hotelier or lodging house owner and argued that their position was similar to that in the Rotunda Hospital case.
Justice Vinelott considered this and in particular that in the Rotunda Hospital case ‘the taxpayers remained in legal occupation of the entertainment rooms and retained control over them. The income was not derived from their property in the rooms, as it would have been if they had parted with legal occupation to someone who had carried out the activities of providing the rooms for public entertainment. That was the ground on which the Rotunda Hospital case was distinguished in the Salisbury House case’.
He went on to quote Viscount Dunedin from the Salisbury House case referring to the fact that ‘the hospital was held to be in occupation of the whole premises’ and Lord Atkin from the same case stating that ‘possession and occupation of the rooms remained with the [hospital]’.
Back to furnished holiday lets
So what does this all mean? Well, where the owner of the property is in occupation of the whole of the premises then a relatively modest amount of other services will be sufficient to constitute the carrying on of a trade.
The services simply need to be above the level of that of a mere landlord. As a result, it is very clear that hotels will, almost without exception, qualify as trading businesses.
But what about furnished holiday letting complexes?
In the South West, it is very common to have complexes of several holiday letting units together with owners’ accommodation. There may be a laundry room, swimming pool, children’s play area and some other facilities.
Typically these properties are converted farm buildings and comprise one integral unit. Such properties are not restricted only to the South West, and I have been in contact with many such businesses throughout the UK.
In such cases and on the basis of the established case law, it would therefore seem that the activities amount to a trade rather than being taxed under furnished holiday letting rules.
That being so, this will continue to be the case regardless of whatever decision is made by George Osborne in the forthcoming Budget.
While this is certainly beneficial from a capital gains tax point of view (and probably from an inheritance tax point of view even though the test is slightly different) it does mean that a liability to National Insurance arises.
I do not know how many businesses might potentially be affected by these considerations but it is certainly clear that a number of them need to reconsider the basis on which they are self assessing their activities for tax purposes and it is hoped that some further guidance might be forthcoming from HMRC.
Such properties are more directly affected by the Rotunda Hospital case than many other let properties because of the nature of the activities and the fact that owners tend to typically live on site.
Much like the expectant mothers in the Dublin hospital, we wait to learn the outcome of the furnished holiday letting saga in the public entertainment of the forthcoming Budget.
John Endacott is a tax partner at Winter Rule LLP and has been involved in discussions with HMRC and HM Treasury in respect of the proposed repeal of the furnished holiday letting rules on behalf of the Tax Faculty and in conjunction with the CIOT.
