Press Room

13 Jun 2024

Surge in Enquiries on Furnished Holiday Letting Income – Andrew Parkes

National Technical Director, Andrew Parkes, discusses how HMRC’s ability to gather information has evolved and advanced in recent decades, as well as how this has facilitated HMRC’s recent crackdown on holiday let landlords, in Taxation.

Andrew’s article was published in Taxation online on 10 June 2024, and in print on 13 June 2024.

Level Foundations

The information balance between HMRC and taxpayers is always in a state of flux. Generally, it can be argued that the taxpayer has the upper hand as they know exactly what they have earned, and exactly how much they have spent, whereas HMRC have to rely either upon what they are told by the taxpayer, or upon what they can obtain from third parties.

However, unless it is a specific request, that information has to be matched back to an individual record which, until relatively recently, was nigh on impossible. When I started my career with the then Inland Revenue, on top of all the filing racks were boxes full of little cards sent by financial institutions giving details of the interest paid on their accounts.

Every so often a handful of cards were removed and the person traced with the information sent on to their District. This only happened when there was time, and the Inland Revenue was much better resourced staff wise than HMRC is now, although in this area, IT has more than made up for the difference.

Now this sort of information is sent to HMRC’s data warehouse, and its comprehensive Connect system will link the information with taxpayers’ records and it can see if the relevant income has been declared.

You do have to allow for false positives. As an aside, my old office received information on how much money exotic dancers were being paid at a London club and checks showed one dancer was travelling from the north of England to earn this money and hadn’t declared their sideline, only their main income. The dancer came for the interview as they fancied a day out in London and thought it would be easier to get the mistake cleared up that way. It was. Turned out two babies had been born on the same day and given exactly the same names. The dancer was the other one.

This then links into the recent news that HMRC has ramped up their activity into the furnished holiday lettings sector. According to a Freedom of Information request by The Telegraph, HMRC increased their enquiries in the sector from 95 in 2021/22 to nearly 2000 in 2023/24.

Unlike The Telegraph, I do not subscribe to the view that this is part of some Government drive to stop people buying second homes in holiday hotspots – getting HMRC to act in a joined-up manner is difficult enough, getting them acting in concert with another Department needs at least a decade, and even then it is not for political ends.

Rather, I believe it is a case of HMRC finally getting their grubby mitts on information that they can use.

Back to my boxes of account information. Rental property is an area where the information upper hand has been with the taxpayer, especially where it is a holiday let. The owner of the property knows who they are, they often live many miles from the property being let, and the property may be advertised personally or via classified ads. It is short term, plus often irregular/non-repeating.

On this basis, HMRC often would not know if a property was let and if they did, who was doing the letting unless the landlord told them. Every so often HMRC may investigate a letting agent and may get details of the landlords and could then check their returns for the income, but still this was hit and miss and labour intensive.

Weekend at the Seaside

Then along comes Airbnb and its copycats, taking over most of this irregular market and providing a potential way for HMRC to level this particular information imbalance. By using their existing powers HMRC could ask, and indeed have asked, these companies for details of the UK properties and the “Hosts” that own them. It is worth noting that these ad hoc requests have been replaced, for the biggest platforms, by an annual requirement to inform HMRC.

Feeding this information into Connect HMRC can then see if the Host has declared the income and if they have, whether the amount declared matches.

It is almost certainly this data that has led to the increase in HMRC activity as it is going to be like hitting fish in a barrel and indeed HMRC’s spokesman said as much to The Telegraph, “The short-term property rental market is growing fast and it’s our role to ensure owners pay the right amount of tax, creating a level playing field for all. We have dedicated specific resource to opening enquiries where there is evidence that those renting out holiday lets have not declared income.”

This sort of data also plays into the way HMRC now carry out a lot of their compliance activity; getting the biggest amount of bang, while spending the minimum amount of buck. In the first instance, this is a very simple point, has the person declared the money? Well, no, otherwise they wouldn’t be in the project. So, in the first instance someone from the admin team can send out the opening letters and keep track of the replies, sending reminders where needed. The idea is then that when the disclosure comes in a trained person deals with it. Given HMRC’s resource levels at the moment, you’ll spot the flaw in that plan.

However, HMRC are clearly concentrating on this area as they have data that is likely to be correct (discounting identically named landlords) and possibly more importantly in this day and age, there is an asset backing the enquiry that means they are almost certainly going to get paid!

I wonder how long it will be before some enterprising person runs an advert alongside Google Airbnb searches offering tax investigation services?

Snagging lists

There are two other angles to this subject though. The first is that some landlords will have been changing their long term lets to holiday lets, because they can offer the chance of more profit, especially once the change to the interest relief rules is taken into account. For many they will meet the criteria for the special regime, but others will be winging it, or despite their best efforts, have discovered that no-one actually wants to rent their studio apartment in the wrong end of town for romantic weekend breaks and they don’t meet the averaging or period of grace criteria.

These landlords are likely to be next on the list for an enquiry, especially once the Airbnb etc. lists have been mined. It is a discrete technical area that doesn’t, in fact, need broad technical knowledge, even if it needs deep narrow knowledge and a commercial awareness. These are attributes that the teams HMRC have put together for the current project will enjoy, plus they may be looking for some work to do.

Therefore, it will be worth asking clients for a little more information, especially if they only have one recent property that is within the Furnished Holiday Lettings regime, to ensure they do not have anything to worry about if HMRC do come knocking.

Holiday Nightmares

A final aspect to be considered is the removal of the special regime for Furnished Holiday Lettings (and despite the election, my money is on it still going ahead). Like many agents I’ve already seen comments along the lines of “I’ve been told by a relative/bloke down the pub/tax adviser based in Belize that when the Furnished Holiday Lettings regime is withdrawn, provided I can show/claim/say I spend over 20 hours a week on my properties I can claim to be trading and get the “old” more beneficial tax treatment.

Often, the first problem here is getting the person to listen as they like what they have been told, even though it is, err rubbish. The second is that often what they have heard has a grain of truth in it. For example, the 20 hours is relevant for incorporation relief and whether a business is carried on. The case upon which it is based, Ramsay v HMRC [2013] UKUT 0226 (TCC), (a different Ramsay) is about property but made the point that business in this context, as in many others, is different to trade.

Then there are those with a little more knowledge who I have seen mention using the badges of trade to argue for trading treatment for their holiday lets. That is a good point, but with one slight problem, it’s wrong – well, for UK property lets at least. In Chapter 1 of both the Parts dealing with trade and property income, the property income rules are given precedence for UK property businesses (and here it is the general term, not a business as in Ramsay) unless you happen to be operating a mine, canal or something similar – let’s see that case come forward. You could get trading for your overseas holiday letting business if you meet the criteria.

Wish you were here

Given HMRC’s ability to obtain information and match it to records and the perennial need of Governments to find cash, we can expect increased HMRC activity in any area where they are now getting regular information that they can match with their records to see if income or gains have been declared. If landlords or side-hustlers have not yet done so, now is the time to bring their tax affairs up to date.

Andrew Parkes

Andrew is a highly experienced international tax specialist who worked at a senior level in HMRC’s international teams for over 10 years. He has a wealth of experience and technical knowledge.

Email: Andrew Parkes