New draft legislation and guidance for FHL rules

Last Updated: 22 Dec 2009

As part of the Pre-Budget Report released on 9th December, the Government published draft legislation and guidance associated with the repeal of the Furnished Holiday Letting (FHL) Rules on 1st April 2010.

At present, these rules determine that self-catering properties that are operated as a business and are occupied for at least 10 weeks per year should be treated as a trading business for tax purposes. This is in recognition of the fact that self-catering businesses are distinct from residential rental businesses and should be taxed as a normal business rather than as a property investment business.

The repeal of the FHL Rules is required as a result of a legal opinion the Government has received, which states that the rules are contrary to European law because they do not allow UK residents who operate self-catering accommodation in other European countries to benefit from the same tax treatment.

The proposed repeal of the FHL Rules would mean that, in future, self-catering businesses will be treated as property investment companies for tax purposes. This means that self-catering operators will no longer be able to, among other things:

• offset income losses against other classes of income
• claim certain capital allowances
• include self-catering income as relevant earnings when calculating maximum annual contributions to pensions qualifying for relief
• claim Entrepreneurs Relief which can reduce the effective Capital Gains Tax Rate to a maximum of 10%.

The draft legislation also seeks to clarify the status of self-catering businesses that, in the past, have argued they are providing a sufficient level of goods and services above accommodation rental to be treated as trading businesses regardless of the FHL Rules. These services include facilities such as tennis courts, swimming pools, games rooms, provisions and meals.

The draft guidance determines that the provisions of facilities such as those outlined above should not be a consideration when determining the tax status of the businesses. Similarly, in the situations where operators provide provisions and meals, only the portion of the business related to the provision of these goods should be deemed to be trading.

A copy of the draft legislation, guidance and impact assessment are available at the following websites.

• Draft Legislation: http://www.hmrc.gov.uk/pbr2009/repeal-lettings-rules-3760.htm
• Draft Guidance: http://www.hmrc.gov.uk/pbr2009/withdrawing-lettings-rules-3760.pdf
• Impact Assessment: http://www.hmrc.gov.uk/pbr2009/furnished-holiday-ia-3760.pdf

We would advise all self-catering operators to contact their accountant to discuss how the proposed legislation and guidance will affect their business

A consultation on the proposed legislation and guidance is now underway with submissions being accepted until 26th February 2010.

Submissions on the proposals should be sent to: Jenni Rich, HMRC CT & VAT, 100 Parliament Street, London SW1A 2BQ; or by email: jenni.rich@hmrc.gsi.gov.uk.