Changes to Furnished Holiday Lettings: Impacts and Solutions
by Kurt Janson
Jan 2010
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The self-catering sector has undoubtedly benefited from the rise of the ‘staycation’. Yet the Government is proposing changes to laws for furnished holiday lettings that could have a major detrimental effect on this sector of the tourism industry. This article clearly presents the significant volume and value of the traditional ‘holiday cottage’ component of the UK self-catering sector. The potential impact of the changes on local communities in terms of revenue and employment is illustrated – much greater than the £20 million estimated by Government. The article concludes by presenting workable alternative solutions to the repeal of the Furnished Holiday Lettings rules.
Due to the recession and the weakness of the pound against the euro, there has been a 16% increase in the number of people choosing to holiday at home [1]. One of the segments that has benefited from this has been self-catering with some agencies reporting a 20% increase in bookings. However, in the 2009 Budget the Chancellor announced that from April 2010 the Furnished Holiday Lettings (FHL) rules will be repealed, which will jeopardise the viability of many self-catering businesses. In a time of recession, the Government should be looking to secure jobs and maintain, if not grow, the domestic tourism economy.
HM Revenue & Customs (HMRC) impact report on the FHL rules change states that ‘the impact on continuing, viable, businesses is expected to be limited…we do not anticipate that this change will have a material impact on the wider tourism industry.’ However, as a result of the proposed changes, operators of self-catering accommodation will face a greater tax liability. Often these types of businesses are run on tight profit margins and this change could severely affect the viability of many of them. This could lead to a significant impact on tourism and secondary associated economies, especially in rural and seaside areas where the majority of self-catering businesses are located.
Within these economies, the Treasury claims 60,000 self-catering properties will be affected by the change and that the impact on these businesses would be ‘only’ a £20 million reduction in spend per annum. In contention of these figures, further investigation reveals that if just 10% of businesses decide to cease trading it can be shown there could be a decrease of almost £110 million [2] per annum in tourism expenditure with the loss of over 2,400 jobs.
When the impact on self-catering within holiday parks is included, the potential overall effect is a reduction of over £200 million in tourism spend and the loss of more than 4,500 jobs in rural and seaside economies – substantially greater than the Treasury’s estimate. As most of the industry is outside metropolitan areas, the financial impact, including job losses, will be regional with the majority occurring in the South West, Scotland, Wales and the North West.
This article sets out to determine the volume and value of the traditional ‘holiday cottage’ component of the self-catering sector and to model the impact that repealing the FHL Rules could have on businesses and employment in local communities. Suggestions for alternative solutions to the repeal of the FHL rules are also given. This demonstration is based upon data from the 2008 UK Tourism Survey and from the analysis of accounts of 218 self-catering businesses undertaken by accountancy firm, DHC Accounting Limited, a specialist in this sector.
The letting of property is not generally considered a trading activity and, as such, income from letting property is taxed under the property income rules. However, under the Government’s current FHL rules, if operators of furnished holiday lettings meet prescribed criteria then the commercial letting of furnished holiday accommodation is allowed to be treated as a trade rather than property business for certain specified tax purposes. This has benefits for eligible operators as they allow various forms of tax relief from normal property income rules.
The Government, however, has determined that the current FHL Rules may not be compliant with European law and, as part of the 2009 Budget, announced their repeal from 2010 to 2011 within the proposed Finance Bill 2010. This will affect operators with property within the UK and European Economic Area (EEA) countries with UK tax liability on income and capital gains from their properties. The Government advises that areas of main fiscal loss are to be as follows.
- Losses from FHLs would not be able to be set against other income (eg other trading or employment income).
- Capital Allowances would not be available.
- Income from FHL would no longer be ‘relevant earnings’ for pension purposes (which could affect those who have no other trading or employment income).
- The sale of the FHL business would no longer be eligible for the following capital gains tax reliefs:
- entrepreneur’s relief (which reduces the taxable gains on the sale of a business)
- roll-over relief (which allows gains arising on the sale of business assets to be deferred if the proceeds of sale are reinvested into other business assets)
- specific hold-over relief for business assets (which allows the accrued gains arising on a lifetime gift of property to another individual to be deferred and assumed by the donee).
According to the latest UK Tourism Survey (UKTS) [1] statistics, the domestic tourism industry was worth £21.1 billion to the UK economy in 2008. Despite the economic downturn experienced during the year, the revenue gained by the sector was down only 1% on 2007.
A conservative analysis of the UKTS figures indicates that the ‘holiday cottage’ (ie excluding self-catering associated with holiday villages, hire boats and timeshare properties) component of the sector accounts for 5.72 million visits (4.9%) and £1.823 billion (8.6%) of total UK domestic tourism expenditure, with an average expenditure of £55.21 per person per day.
When travel purely for holidays is separated from business travel and travel to see friends and relatives, the importance of self-catering cottages is more marked, accounting for 7.6% of all holiday visits, 12.4% of all nights and 12.9% of all revenue.
In addition, the separate BH&HPA analysis of static caravans and holiday parks [3] indicates that caravan holiday homes account for a further 8% of all tourist bednights in the UK and £1.136 billion in domestic tourism expenditure, giving a total level of expenditure potentially affected by the change of almost £2 billion per annum.
Breaking the UKTS expenditure figures for holiday cottages into regional areas shows this sector of the self-catering industry to have relatively even spread throughout Wales, Scotland and the regions of England.
According to the 2008 UK Tourism Survey [2] figures, most areas have 5% to 10% of the total expenditure associated with self-catering. The main exceptions are Scotland (16.6%) and the South West, which, as a prime holiday destination with few cities, accounts for over 30% of all self-catering expenditure in the UK. At the lower end of the spectrum, the metropolitan regions of London and the West Midlands collectively account for just over 2% of self-catering accommodation, indicating that this form of accommodation is highly concentrated in rural and seaside areas.
To further quantify the importance of self-catering accommodation to regional economies, when expenditure on holiday cottage accommodation is expressed as a percentage of total domestic tourism expenditure on a regional and national basis, it shows that regions with a significantly higher than average dependence on this sector are Scotland, Wales and the South West. This sector accounts for, respectively, 10.7%, 12.8% and 15.8% of all domestic tourism receipts.
If the figures are looked at in terms of destination types rather than regions, analysis shows that just over 70% of expenditure associated with self-catering (over £1.2 billion per annum) occurs in seaside and rural locations. If small towns are included, the proportion of businesses located outside large towns and cities increases to 88% (£1.54 billion per annum).
As no exact figures are available for the numbers of holiday cottage businesses in this sector, an estimate can be made by extrapolating figures from the per annum expenditure on self-catering accommodation and dividing by the average yearly turnover.
UKTS figures give the numbers of nights spent in these self-catering businesses as 33 million per annum. Multiplying this by the average expenditure per night on accommodation (£21.33 [4]), gives the total annual revenue spent on self-catering accommodation in the UK as £704 million.
Converting this into the number of holiday cottage businesses in the self-catering sector, figures are used from DHC Accounting Limited analysis [5]. The turnover of the average self-catering business that employed this firm was £17,347 per annum; dividing the total expenditure by this figure gives an estimate of 40,602 businesses in this sector. It should be noted that the estimate of self-catering businesses is conservative as businesses that use an accountancy firm will be larger than the average and tend to operate multiple rental units.
The BH&HPA analysis of the holiday park sector [3] indicates that there are a further 570 holiday park businesses and 83,000 private individuals operating a static caravan as a self-catering business who would be affected by the change. This gives a total of over 123,000 businesses potentially affected by the change.
Given that the per annum tourism spend in this sector is £1.823 billion, and an estimated £704 million is spent on accommodation, that leaves £1,119 million for expenditure on other products and services, ie as spend in the community. Using these figures, estimates of the number of jobs associated with self-catering businesses can be generated using a 2003 study on tourism employment by VisitBritain.
This study, Employment Generated by Tourism in Britain[6], found that average turnover required to generate an additional Full Time Equivalent (FTE) tourism job outside London was £39,500 – taking account for inflation since 2003, this figure increases to about £45,000. Applying this figure to expenditure on holiday cottage related vacations gives the following estimates of employment associated with this sector of the self-catering industry.
| Region | Spend on accommodation (£ million) | Employment in sector numbers | Spend in community (£ million) | Other local employment numbers |
| UK total | 704 | 15,651 | 1,118 | 24,853 |
| Northern Ireland | 6 | 123 | 12 | 275 |
| England | 501 | 11,125 | 822 | 18,268 |
| Scotland | 132 | 2,929 | 170 | 3,788 |
| Wales | 66 | 1,474 | 113 | 2,522 |
| England by region | | | | |
| West Midlands | 6 | 142 | 7 | 164 |
| East of England | 40 | 886 | 57 | 1,275 |
| East Midlands | 38 | 834 | 65 | 1,448 |
| London | 8 | 175 | 19 | 418 |
| North West | 67 | 1,484 | 146 | 3,235 |
| North East | 24 | 531 | 31 | 695 |
| South East | 32 | 706 | 90 | 1,992 |
| South West | 238 | 5,285 | 336 | 7,473 |
| Yorkshire | 44 | 976 | 62 | 1,381 |
Source: Employment Generated by Tourism in Britain
As can be see in Table 1, there are over 15,600 FTE jobs directly related to this type of self-catering business, and visitors to these premises spend a further £1.1 billion in local businesses such as restaurants, attractions, pubs and shops. This secondary expenditure accounts for a further 24,800 jobs, giving a total of over 40,000 jobs dependent on this sector – over 70% of which (over 28,600) are located in rural and seaside areas.
It is important to note that the majority of the employment associated with expenditure on this form of accommodation is related to local services and trades people, rather than owners of self-catering properties. As an illustration, this can be seen in the DHC Accounting Limited analysis [5] of 218 self-catering businesses. The analysis shows that these businesses generated combined revenues of £4.2 million in 2009. Of this, £2.25 million (53%) was spent employing local tradespeople and cleaners, while a further £0.78 million (19%) was spent on furnishings, the majority of which would be obtained from local shops.
Therefore, as most owners of self-catering premises live within five miles of the property, it can be seen that the vast majority of expenditure generated by self-catering properties stays within local communities and does not accrue to owners who live in cities.
Having determined that the holiday cottage sector is a large and important component of the UK domestic holiday industry, employing the equivalent of over 40,000 people full time in mostly rural and seaside areas, what are the calculations for the potential impact of repealing of the FHL rules on regional economies?
The DHC Accounting analysis showed that collective profit from the 218 self-catering businesses, before interest payments, was just £830,000 – an average of £3,800 per business. This indicates that self-catering businesses operate on marginal profitability. The low level of profitability and the very high level of expenditure on the maintenance of self-catering properties noted previously indicate that a change to the tax treatment of these properties would have a significant impact on their viability.
The accountant’s analysis of these companies’ accounts concluded that the impact of repealing the FHL rules would be to reduce the profit of these businesses by an average of £1,307. Multiplying this figure by the estimated number of holiday cottage businesses in the UK (40,600) gives a cost of £53 million per annum, significantly higher than the Treasury estimate of £20 million.
This figure also means that the average profit of these businesses would be reduced by 34% from £3,800 to £2,493 per annum. While there is no way of knowing the impact that this drop in profitability would have on self-catering businesses, it is reasonable to assume that a percentage of operators would decide that it is no longer worthwhile to operate their business and withdraw their properties from the market.
While some of these properties would be sold to permanent residents, the majority would revert to use as second homes and use would fall from the average 23 weeks per year under self-catering operation. As a result, the level of revenue spent in the local economy would also fall significantly. In addition to the direct spend, the indirect contribution of the property to the local economy will also decrease as expenditure on local tradespeople and cleaners would reduce (commercial properties require greater levels of maintenance than private properties).
Therefore, it is estimated that converting a self-catering property to a second home will reduce revenue to the local economy by 60%. This is probably a conservative estimate as the BH&HPA analysis of revenue generated by a self-catering static caravan [3] shows that there is an almost 70% reduction of expenditure in the local economy when the use switches from a self-catering business to second home.
While the impact of the change of FHL rules on capacity in the holiday cottage sector is difficult to determine, estimates of a reduction of between 5% and 15% seem reasonable based on the 34% reduction in profitability.
Using the range above at 5% intervals, the impact of the change in terms of revenue and employment in local economies is estimated to be as follows.
| Decline in capacity | Reduction in number of businesses | Local economy reduction in revenue (£ million) | Reduction in jobs in local economy |
| 5% | 2,030 | £54.7 | 1,215 |
| 10% | 4,060 | £109.4 | 2,431 |
| 15% | 6,090 | £164.1 | 3,645 |
To provide an indication of where in the UK the reduction of capacity would have the greatest impact, further analysis was undertaken. The following table indicates that, as expected, regions most dependent upon self-catering would be the most severely impacted with the South West being hit the worst. Up to 1,148 jobs are likely to be lost there if the number of holiday cottages available drops by 15%.
| Region | 5% reduction | 10% reduction | 15% reduction |
| UK total | 1,215 | 2,431 | 3,645 |
| Northern Ireland | 12 | 24 | 36 |
| England | 882 | 1,764 | 2,645 |
| Scotland | 201 | 403 | 604 |
| Wales | 120 | 240 | 360 |
| England by region | | | |
| West Midlands | 9 | 18 | 28 |
| East of England | 65 | 130 | 195 |
| East Midlands | 68 | 137 | 205 |
| London | 18 | 36 | 53 |
| North West | 142 | 283 | 425 |
| North East | 37 | 74 | 110 |
| South East | 81 | 162 | 243 |
| South West | 383 | 766 | 1,148 |
| Yorkshire | 71 | 141 | 212 |
Commenting on a survey of members undertaken by the Federation of Small Businesses (FSB) in November 2009, National Chairman, John Wright, warned of the damage that the proposed repeal of the FHL rules could have on the self-catering sector. He says [7]:
'These tax changes could stifle trade, threatening the existence of the 60,000 self-catering companies across the country and costing jobs … more than half of those it surveyed said that they would have to make staff redundant if the tax rules were changed and 81 per cent said that changing the rules on their tax status would affect their financial viability. Another 43 per cent said that the tax rules would put them off expanding their business and eight in ten said that they would not be able to take on any new staff.'
Also voicing concern are the National Farmers Union, regarding the impact on farmers who have been encouraged by the government to diversify away from agriculture and into tourism by opening self-catering premises on their properties, while the Rural Shops Alliance is concerned about the impact on already hard-pressed village and neighbourhood shops.
Currently, self-catering properties in the UK have to be available for 20 weeks per annum and occupied by customers for 10 weeks per annum to qualify for the FHL rules.
UK taxpayers who obtain income from furnished holiday accommodation situated elsewhere in the European Economic Area (EEA) are not eligible for the FHL rules. This difference may, according to the Treasury, not be compliant with European Law.
However, compliance would be achieved, and UK self-catering businesses protected, by extending FHL rules to include all UK owners of furnished holiday accommodation in the UK and other EEA countries, and at the same time increasing eligibility thresholds for FHL rules to, for example, 30 weeks availability and 15 weeks occupancy.
This would result in most UK self-catering businesses continuing to qualify for FHL rules, whilst ensuring that most EEA properties did not comply due to their shorter occupancy period.
Therefore, if thresholds were set at the appropriate level, this solution would be tax neutral for the Exchequer.
This solution would classify furnished holiday letting business as a ‘trade’ unless customer occupancy is below a certain level for a tax year –10 to 15 weeks seems appropriate. Subject to certain criteria, this would protect professional UK self-catering businesses while UK residents with properties in the rest of the EEA would be treated as ‘foreign trades’ rather than property letting businesses.
This means that, under Section 95 of the Income Tax Act 2007, owners would only be able to offset any losses on the operation of their overseas accommodation against other income gained in that country, again making the option tax neutral for the Exchequer.
Self-catering businesses are more akin to B&Bs and guesthouses than they are to residential lettings due to three important factors:
- the customer only stays for a short period (typically a week)
- the customer gains no rights of occupancy (unlike a tenant)
- the accommodation is not the customer’s residence.
However, HMRC guidance on what constitutes a ‘trading’ business does not make this distinction clear and tends to classify most self-catering properties as residential rental properties. If this guidance was realigned to clearly distinguish between self-catering cottages and residential properties on the basis of the large number of extra services that are provided by self-catering operators, this would protect UK businesses while making overseas properties subject to Section 95 of the Income Tax Act 2007.
Once again this would protect UK businesses and be tax neutral for the Exchequer.
The potentially damaging impact that the proposed repeal of the FHL rules may have on the country’s self-catering sector is underlined in terms of a stark reduction in profitability, leading to significant job losses in areas of the country already badly affected by the recession. Impact upon rural and seaside economies rather than urban areas is highlighted especially when expenditure associated with self-catering accommodation is assessed on the basis of destination type rather than region.
The analysis in this article suggests that if just 10% of businesses decide to cease trading as a result of the repeal of the FHL rules, tourism expenditure would decrease by almost £110 million per annum and over 2,400 jobs would be lost. When BH&HPA’s analysis of the impact on holiday parks is included, the overall impact is a reduction of over £200 million in tourism spend and the loss of over 4,500 jobs in rural and seaside economies – substantially greater than the Treasury estimate of a £20 million impact.
This comes at a time when the Government should be doing everything possible to protect jobs and support the rural economy. As Shaun Spiers, the Chief Executive of the Campaign to Protect Rural England has said of the proposed changes:
'Any measures that could damage sustainable economic activity in rural areas during these recessionary times need to very closely looked at.'
Kurt Janson has a Masters Degree in Public Policy from Lincoln University (NZ) and worked for the New Zealand Department of Conservation and subsequently for the New Zealand Tourist Board, developing national and regional tourism strategies. He moved to Britain in 1997 to work as Policy Manager for the English Tourist Board and the British Tourist Authority. Later he became the Head of Strategic Planning for VisitBritain with responsibility for Policy, Strategy, Sustainable Tourism, Business Planning and Marketing Evaluation.
Kurt left VisitBritain in 2004 to set up his own tourism consultancy business which, as well as undertaking research projects for a number of tourism businesses and organisations, provides tourism policy advice to the Tourism Alliance, an umbrella trade association for the tourism and hospitality sector that comprises almost 50 industry associations representing almost 200,000 business of all sizes throughout the UK.