Kurt Janson: New holiday cottage tax rules could harm tourist industry

AMONG all the "doom and gloom" reports on the UK economy, one piece of recent good news passed by almost undetected.

The latest figures from tourism board VisitEngland show that domestic holiday visits over the summer were up by about 15 per cent as UK residents sought a holiday at home due to the economic uncertainty and the weakness of the pound against the euro. As a result, revenue

generated by the UK tourism industry during 2009 is on track to increase by about 1.5bn.

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The even better news about this is that 70 per cent of this revenue will have been spent outside large towns and cities. That's just over 1bn of additional expenditure going into local rural and seaside economies, helping to maintain jobs and protect small businesses in these areas from the recession.

At the forefront of this resurgence in domestic tourism is the self-catering sector where revenue has increased by about 20 per cent and now accounts for some 18 per cent of all domestic holiday stays in the UK.

The reasons for this are twofold – more families are looking for good-value holidays where they can relax and operators are providing high quality cottages with all the luxuries that families would expect at home, such as flat screen televisions, dvd players, coffee makers, high quality crockery, glasses and linen.

The self-catering industry is particularly important in Yorkshire, which has an estimated 2,500 businesses – more than anywhere else except the South West and North West. These local businesses, often run alongside other businesses such as farming operations, generate about 1,000 jobs and the revenue that visitors to these properties spend in local Yorkshire communities helps keep a further 1,400 people employed in local shops, pubs and attractions.

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Considering that the sector brings high levels of revenue and

employment to rural and seaside economies, and grew by a fifth last year, you would think that the Government would be falling over backwards to support it. Sadly, that's not the case.

On April 1, the Government is proposing to repeal the Furnished Holiday Letting Rules (FHL) as a result of legal advice that says they do not comply with European Law.

This means that, for tax purposes, self-catering businesses will change from being deemed a "trading business", the same as any other business including B&Bs and hotels, to being deemed a "property investment businesses", which makes them the same as buy-to-let apartments.

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While, on the face of it, this may seem just to be a technocratic change of no particular significance, the impact on the self-catering sector will be considerable.

Although demand for self-catering holidays is increasing, operating a self-catering business is certainly not a licence to print money – start-up costs are high due to the price of suitable properties and the need to undertake refurbishment to the high standard expected by today's customers, and returns are low due to long periods during the

winter season when many cottages are vacant.

Being classified as a "trading business" means that capital allowances and loss reliefs can reduce the cost of setting up a business by up to 40 per cent, thereby encouraging new entrants into the market.

Changing the designation of these businesses to "property investment" would reduce these allowances and significantly reduce the viability of further investment. In turn, this will limit the growth of rural and seaside economies where tourism revenue is important.

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The second main impact would be to reduce the quality of existing properties.

The level of investment required to operate and maintain a self-catering property to the standards expected by customers and prescribed by the national Quality Assessment Scheme is significant. Bed linen, towels, crockery and cutlery require replacing every one to two years, while washing machines, dishwashers, flat screen televisions, music centres, furnishings, carpets, beds, only have a three to five-year life span before they need replacing.

Changing the designation of self-catering cottages will result in operators only being able to claim 10 per cent wear and tear allowance rather than 100 per cent capital expenditure relief.

The lower level of relief will result in both the quality and quantity of the fittings and maintenance being reduced. This will adversely

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affect the quality of the cottages, the experience that customers receive and, ultimately, the viability of these businesses.

While repealing the FHL rules is unavoidable, finding a solution that protects the status of self-catering properties is relatively easy – all that needs to happen is for HMRC to issue guidance saying that if you operate self-catering units that are available for at least 20 weeks a year (at least 10 weeks of which they are occupied) and you provide a range of services above those expected of a landlord, your business is a trading business.

All that is needed to make this happen is a modicum of nous to recognise that holiday cottages are different to buy-to-let flats.

Surely even the Government can see that?

Kurt Janson is policy director of the Tourism Alliance.