Swathes of holiday let owners are trying to pay business rates instead of council tax on their property in order to avoid double charges, but now face waits of up to a year to do so.
This year, local councils in England gained the power to charge up to double the standard council tax rate on properties considered second homes.
But a loophole in the rules means homes rented out as holiday lets can be classified as small businesses and owners can pay business rates – an alternative to council tax that can involve lower charges – instead.
Property experts have told The i Paper they have seen a surge in holiday let owners switching to paying business rates to dodge the so-called “second homes premium”.
But switching involves a lengthy process, and large numbers of applications is creating a backlog.
In June this year, the Valuations Office Agency (VOA), which assesses applications for business rates, reported that cases were taking six months to clear, but this has now increased to average wait times of 9-12 months, according to an email from the VOA, seen by The i Paper.
It told The i Paper that “high demand” was slowing down the process in some cases.
The government department said it is moving more staff to work on processing these applications to clear the backlog, but experts also fear that the switches could pose financial issues for councils if they result in lower tax take.
Islay Robinson, chief executive of mortgage brokers Enness Global, said: “The current backlog suggests the VOA is facing a sharp increase in applications from landlords and short-let hosts seeking to move their properties from the council tax valuation list to the ‘non-domestic rating’ list.
“While movements between these two lists have happened in the past, the current wave is different, and it appears to have accelerated following the changes introduced in April.”
Why are so many holiday let owners switching?
Holiday lets in England qualify for business rates if they are available to let for at least 140 nights in a year, and are actually let for 70 of those nights.
However, in the past, many owners have not bothered to apply and have settled for paying council tax. But new premiums on second homes have pushed many to make the switch.
For a typical band D home in Cornwall – a hotbed for holiday lets – a double council tax charge would increase the owner’s council tax bill from £2,459.92 per year to £4,919.84.
The problem is that many holiday lets will be eligible for small business rates relief of up to 100 per cent, meaning that by switching to business rates, they will end up paying nothing.
In England, a property with a “rateable value” – the amount it would rent out for at market value – of less than £15,000 is eligible for small business rate relief of up to 100 per cent, meaning they can avoid paying the tax altogether. The thresholds are slightly different in Wales and Scotland.
If a property does qualify for business rates, the owner is also able to claim a refund on overpaid council tax dating back to when the property first qualified for business rates. This could see councils shelling out thousands of pounds in council tax refunds.
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Experts are now warning that this could materially impact councils’ funding, particularly in holiday let hotspots, which could see local residents having to make up the shortfall.
Paula Higgins, chief executive of the HomeOwners Alliance, confirmed she has seen a trend of holiday lets switching to business rates and is concerned that this could dent councils’ revenue.
She explained: “Holiday lets that pay business rates often contribute far less to local services than regular second homes, because many qualify for rate relief – and even when they do pay, some of that income goes to central government rather than staying in the community.
“Councils that think they’ll gain from higher council tax on second homes could actually end up worse off if all those owners switch to business rates.”
What could the Government do about this issue?
The issue for the Government is that holiday lets have always been eligible for business rates, and holiday let owners are not doing anything wrong by switching, but experts say it may be forced to intervene if councils experience a funding shortfall.
Robinson said: “If this pattern continues, there may be growing calls for policy reform – from tighter eligibility rules to new levies or reforms to business rate relief – aimed at protecting council revenue and maintaining fairness across communities.
“Possible responses could include tightening the eligibility criteria for business rates by raising the threshold for what qualifies as a holiday let, introducing a baseline local tax on all second homes regardless of classification, or capping or reducing small business rate relief for short-term lets.”
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Higgins said that while the switch is bad news for councils, it is a benefit for the communities if the double council tax charge is pushing more second homeowners to turn their properties into serious holiday lets.
“The upside is that, to qualify as a business, these homes have to be rented out – meaning fewer empty properties and more homes available for holidaymakers and renters, helping to keep local economies and communities alive,” she said.
A VOA spokesperson said: “We aim to resolve self-catering cases within six months, and sooner if we can, but due to high demand, a small number are taking longer and we’re sorry for this.
“We have put more people on to this work to help us bring our response times down as quickly as possible. We’re working through the oldest cases first and prioritising customers experiencing financial hardship.”
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