The Truth About Second Home Owners Avoiding Tax.

Flipping, loopholes and a potential £36m loss to councils in the West

As is my habit on a Monday Morning I popped into Porthleven supermarket on the way to the office for orange juice and milk to be faced with the glaring headline ‘Second Home Owners Avoid Tax’ on the front page of the newspaper.  I won’t say which one but if you live in the West you might use it to get your news in the morning.  Once I got to my desk several people had emailed me links to what seemed to be pretty much the same article in most of the other locals and plenty of strong comments both underneath the articles and across local Facebook groups.

The key points in the articles is as follows:

• West Country Councils could lose up to £36m
• loophole allows second home owners to pay no rates at all
• 1000 homes in Cornwall have been ‘flipped’ to be classed as holiday lets
• Council is £1.5m worse off
• With 14,500 second homes in Cornwall the shortfall could be £20m
• Including Devon could be £36m
• Owners claiming their rental property is exempt by the low level of income
• To qualify properties only have to be available to let for 140 days a year

Now I’m no Anne Robinson but I thought I’d put on my investigative journalist’s trilby and take a look into what is going on here.

What is flipping?

This was the term used when MPs were changing the status of their taxpayer funded second homes in London so that they would be exempt from capital gains tax and so is a strong word that conveys sleaze and wrongdoing.  In this case it is referring to second home owners falsely claiming that their property was a qualifying holiday let in order to avoid paying council tax and claim small business rate relief.

How does it work?

If you have a second home and you want to flip it here’s what you would have to do:

1. Call the central valuation office and lie to the officer telling him you are holiday letting and ask him to register the claim.
2. When the local office contacts you you need to lie to that officer too and ask him to send an information form.
3. Complete the form fraudulently, making up details about weeks available, rental income etc and where the property is marketed.  Note this is a criminal offence rendering you liable to prosecution and if you continue for a number of years so the fraud is over £10,000 you may well face a jail sentence.
4. You need to prove that the property is a bona fide holiday let so make a website for it and fill in the availability with false bookings, perhaps an advert on a few directories would be a good idea too.
5. Once you have successfully pulled the wool over the eyes of the valuation office and have rateable value and reference number, call the Cornwall valuation office and ask to apply for small business rate relief
6. Fill in the form and put your signature to a second fraudulent application, this time for business rates and commit a second offence.

Just to make it clear in order to qualify the property has to have a rateable value of less than £6,000 which has nothing to do with the rental income- the original reporter was a bit confused here (wrong!)  Also the minimum availability to qualify as a holiday let for tax purposes went up to 210 days a few years ago so that’s another little slip up.

Note that 100% small business rates relief was introduced in October 2010 as a result of the recession and currently is only guaranteed until April 2015, the Chancellor lets us know if it is to be continued in each autumn statement.  Business rates are generally higher than Council Tax so when it is removed as it surely will be at some point you will actually pay more, though the relief was historically 50% so our expectation is that it will return to that level.

Council Left £1.5m Worse Off By Flipping

In order to calculate the cost of the problem we need to estimate what proportion of the 1,000 properties that have changed to holiday letting are fraudulent.  There’s actually three categories of people here- Fraudulent applications, properties genuinely changing to holiday letting and properties that have been holiday lets for years and the owners didn’t know they should have registered for business rates.

Reporters calculation:

Fraudulent applications 100%

Genuinely changing to holiday letting 0%

Already a holiday let 0%

So that’s fraud of 1000 x average council tax of £1,500 to give £1.5m

Simon’s calculation

Fraudulent applications 0.5%

Genuinely changing to holiday letting 50%

Already a holiday let 49.5%

giving a fraud of 5 x £1269 (band D on average) so £6,345

So how could councils in the West lose £36m?

Honestly this is a simple calculation- try to keep up!

If all 14.500 second home owners in Cornwall decide to risk prosecution and potentially jail by submitting a fraudulent claim for small business rates relief then the council would lose 100% of their council tax revenue from this source and the the loss could be up to £20m.  Just add all of the second home owners in Devon also becoming criminals and you get to £36m.  Nothing wrong with the maths there!

Alternative Headlines

There are of course consequences to properties switching from being a second home to a holiday let.  Small communities in danger of losing local services get an influx of people instead of houses being locked up, jobs are created in caretaking & marketing and holidaymakers spend their money in Cornwall.

A quick calculation based on our agency gives the equivalent of 15 full time jobs per hundred cottages and if we assume each party of visitors spends £500 in a week (pretty cautious) we could go for:

Tax Incentive To Change To Holiday Letting Could Create Over 2,000 jobs in Cornwall

or

Persuading Second Homes to Switch To Holiday Letting Would Add £180m To Cornwall’s Economy

On A More Serious Note

I’ve had a bit of fun explaining the numbers on this ridiculous set of news articles but I’d actually like to ask a serious question to the editors of the papers:  Do you really want to go so far out of your way to create sensationalist news bashing second home owners and by extension making visitors feel less welcome in Cornwall?