Council Tax for second and empty homes, and non-domestic rates thresholds: consultation

Non-Domestic Rates – Self Catering Accommodation Thresholds

The current position

In October 2022 there were 18,290 self-catering accommodation units on the valuation roll for non-domestic rates across Scotland. This represents an upward trend in numbers of more than 20% over the past five years. Self-catering accommodation accounts for 7% of all properties in Scotland liable for non-domestic rates.

The numbers of units per council area vary considerably, with the highest numbers located in tourist hotspots such as Highland (5,050), Argyll and Bute (2,290), the City of Edinburgh (1,410), Dumfries and Galloway (1,400) and Perth and Kinross (1,100).

The owners, tenants or occupiers of self-catering accommodation (who may be businesses, the public or the third sector) may be liable for either council tax or non-domestic rates. This includes owners of second homes who use them for self-catering accommodation.

Which tax is paid is determined by the amount of time the accommodation is used and available for use for self-catering accommodation purposes.

Where a dwelling is available for let for 140 days and actually let for 70 days or more in the financial year, it is classed as 'self-catering holiday accommodation', exempt from council tax and becomes instead liable for non-domestic rates. If these thresholds are not reached, the accommodation will be treated as domestic and liable for council tax instead. Wales and England also have a minimum 70-day let/140-day available for let rule, but from 1 April 2023 in Wales, the minimum number of days a property is required to be made available to let in a 12-month period will increase to 252 days and the minimum number of days it is required to be actually let will increase to 182 days.

The thresholds which currently apply to self-catering accommodation for non-domestic rates have been in effect since 1 April 2022 and were introduced following a recommendation by the 2017 independent Barclay Review of non-domestic rates. The previous threshold only required self-catering accommodation to be available to let for 140 days. The Barclay Review noted there was no requirement to provide evidence of this availability to let. This arrangement was therefore open to abuse, with the potential for the owners of second or empty homes to seek their accommodation to be classed as non-domestic in order to avoid council tax.

Non-domestic rates are based on the rateable value of premises, which is calculated by independent Scottish Assessors based on the annual rental value that a property would attract in an open market. Where the rateable value is low enough, the premises may be eligible for the Small Business Bonus Scheme (SBBS) and receive up to 100% non-domestic rates relief.

Under the current arrangements, Scottish Assessors determine whether self-catering accommodation has met the thresholds in each financial year and may request evidence of actual letting, availability to let or both. Where a property is not determined to be self-catering accommodation, it will be removed from the valuation roll and liability to pay council tax will arise.

Councils, who administer and collect the tax, have discretionary powers that enable them to treat properties as self-catering accommodation in exceptional circumstances. This is in situations when the accommodation has failed to meet the 70 days actual letting threshold. Examples of exceptional circumstances might include a pandemic, or environmental or seasonal conditions e.g. where travel to and from an island is limited to ferries that can be restricted due to the weather, or any other physical impediment that would hinder access to the property (landslides, floods and fire).

Small Business Bonus Scheme (SBBS)

The Small Business Bonus Scheme (SBBS) offers up to 100% Non-Domestic Rates relief to non-domestic premises in Scotland with rateable values below a certain level.

From 1 April 2023, SBBS will offer 100% relief for individual premises with a rateable value of up to £12,000. The upper rateable value for individual premises to qualify for SBBS relief will be extended to £20,000 and relief will taper where the rateable value is between £12,001 and £20,000. The cumulative rateable value of all non-domestic premises held by a single ratepayer will remain the same and must be no more than £35,000.

As at 1 July 2022, 88% (16,130) of self-catering accommodation units on the valuation roll were in receipt of SBBS relief at a cost of over £21 million. The majority of these (96%) benefited from 100% relief and therefore paid no local tax.

The legislative framework

The Scottish Government is responsible for the policy and legislative framework for non-domestic rates, including setting the tax rates and reliefs that it funds. Scottish councils administer and collect the tax.

The Council Tax (Dwellings and Part Residential Subjects) (Scotland) Regulations 1992, as amended by the Council Tax (Dwellings and Part Residential Subjects) (Scotland) Amendment Regulations 2021 set out the current thresholds for self-catering accommodation.

The Council Tax (Dwellings and Part Residential Subjects) (Scotland) Regulations 1992, as amended, provide councils with the discretion, in exceptional circumstances, to treat self-catering accommodation as if it has met the threshold of being actually let for 70 days.

Self-catering accommodation thresholds - in-year assessment

The 70 day letting threshold must be met 'in-year', that is within each financial year (from 1 April to 31 March). This means that accommodation will not temporarily move from non-domestic to domestic at different points in the financial year. By comparison, in England, the 70-day letting requirement is 'per year', but from 1 April 2023, this will become 70 days 'in the last 12 months'. The Welsh Government has published guidance outlining that in Wales a 12-month rolling period is already in place.

In Scotland, if accommodation is not let or available to let for the required thresholds, it will become liable for council tax. The date council tax will be payable will depend on which of the thresholds first fails to be met (paragraph 2 of schedule 2 of the Council Tax (Dwellings and Part Residential Subjects) (Scotland) Regulations 1992):

• from the date it is used as the sole or main residence of any person
• from the date it is not intended to be let (where the 140 day available to let threshold is not met)
• from 1 April in the same financial year (where the 70 day actual let threshold is not met)

The case for change

In this consultation paper we have proposed the use of council tax increases for second and long-term empty homes, as a tool that councils may decide to use to encourage homes to be used with a higher occupancy. As some second home owners may choose to let their home out as self-catering accommodation for part of the year, it is appropriate to consider at the same time whether the thresholds in order to be classed as non-domestic accommodation are set at the right level.

Proposals for Consultation

We want to ensure that people owning accommodation within communities are making fair financial contributions to local public services and the economy. This recognises that self-catering accommodation can play an important role in particular areas through its contribution to tourism and related industries/businesses. We are therefore seeking views on whether self-catering accommodation thresholds, for the purposes of non-domestic rates, are appropriate or should be amended. No specific alternative thresholds are being proposed at this point in time and further analysis would be undertaken if this type of reform were considered following the consultation.

We are interested to also know whether, given the variation in second homes and self-catering accommodation numbers across council areas, councils should have discretion to change the threshold locally to reflect local circumstances. In particular, we would welcome views on whether they should they have power to increase or decrease the number of days of actual letting required for a property to be classed as self-catering holiday accommodation.

Finally, we invite views on the non-domestic rates system more generally in respect of self-catering accommodation.