Tax Faculty highlights problems with the proposal to abolish FHL status
We remain very disappointed by the announcements and further papers concerning furnished holiday letting (FHL) published with the Pre-Budget Report on 9 December 2009. In TAXREP 10/10, submitted to HMRC last week, we have explained why we think this is the wrong course of action.
- The figures used to form the basis of the impact assessment are highly implausible. They fail to include the many businesses which report this income as part of a larger trading activity, such as farming and also FHL income generated by companies.
- The FHL scheme is being abolished because landlords with income from furnished holiday accommodation elsewhere in the European Economic Area (EEA) could not qualify for FHL treatment. The Government is concerned that this difference may not be compliant with European law.
- We accepted this concern of HM Treasury and, with that in mind, sought to find a compromise through a series of meetings and correspondence, working with other professional bodies and HMRC. We proposed modifications to the existing scheme which would, we believe, have made retention of the current regime, extended across the EEA, more acceptable, albeit in a restricted form.
- Our aim in doing this was not focused on how much tax such businesses pay, but rather their administrative burden in determining whether each business was a trade.
- A variant of our suggested compromise has been considered briefly as option 3 of the impact assessment, but does not feature as part of a wider consultation. In our view, retaining the scheme, extended to properties elsewhere in the EEA but restricting the tax benefits available, would have been preferable to abolition. We regret that our proposals for compromise have not been pursued.
- The fundamental problem with abolishing the scheme altogether, is that businesses must now self assess whether a property business is carrying on a trade and be taxed as a trade, or whether it is to be taxed as property income. This creates an unnecessary and unwelcome administrative burden.
- The guidance in the Technical note issued on 9 December 2009 is inadequate and avoids all the difficult issues. The position of each business will need to be considered on a case by case basis and reviewed every year. This will lead to costly Tribunal hearings, which will waste public money and give rise to a new body of case law. This could and should have been avoided.
- A clear statement is needed on where the dividing line is between trading and passive income from letting property. This should include how HMRC will in future distinguish hotels from other furnished holiday lets.