Short-term lets: business and regulatory impact assessment

F. Costs to local authorities and recovery through fees

91. To inform this BRIA, the Scottish Government has sought to determine the costs of the licensing scheme to local authorities and, therefore, the possible fees that might be charged to short-term let hosts. The actual fees to be charged will be determined by local authorities following Scottish Government guidance.

92. The Licensing Order requires all short-term lets in Scotland to have a licence to operate. To obtain a licence, hosts will need to demonstrate compliance with a set of mandatory licence conditions that will apply Scotland-wide. These conditions primarily concern the safety of the accommodation, including the following direct safety measures:

(1.) Fire safety of the premises and furniture and fittings

(2.) Gas safety

(3.) Electrical safety

(4.) Water safety: Private water supplies

(5.) Water safety: Legionella

(6.) Safety and repair standards

(7.) Maximum occupancy.

93. There are also mandatory conditions which assist with compliance and enforcement and also help to protect guests and neighbours:

(1.) Agents: to make sure the day-to-day managers are named on the licence

(2.) Type of licence: only the type of short-term let specified on the licence may be offered

(3.) Information to be displayed for guests

(4.) Planning permission: ensuring compliance in control areas

(5.) Listings: ensuring that the licence number and EPC rating (where an EPC is required) are displayed on any advert or listing; and make sure that the advert or listing is consistent with the terms of the licence (e.g. around maximum occupancy).

(6.) Insurance: ensuring adequate buildings and public liability insurance are in place

(7.) Fees: payment of any fees due to the licensing authority

(8.) A prohibition on providing false or misleading information.

94. Local authorities must also check that the host is a fit and proper person to hold a licence.

95. Local authorities will be responsible for establishing and running the licensing scheme. This will be a significant undertaking for licensing teams across Scotland and will impose new costs. Local authorities can recover the costs of establishing and running the scheme through fees. Licensing fees must not be set at a level greater than the amount necessary to recover establishment and running costs.

96. Establishment costs include setting up the scheme and preparing staff to run it. Running costs include such matters as processing applications and renewals, undertaking site visits, handling complaints and other monitoring and enforcement costs.

97. Local authorities have the power to charge a fee for an inspection, where the inspection results from the host's failure to comply with licence conditions or a complaint relating to the premises which is not frivolous or vexatious. (Fines are also payable for short-term lets that operate without a licence or breach licensing conditions, for example, but do not go to the local authority^[29].)

98. Some stakeholders expressed concern that a licensing scheme operating on a cost recovery basis meant that local authorities could establish costly and inefficient systems and pass costs on through high licence fees. They considered that cost recovery provided no incentives to keep costs down or drive efficiency. However, local authorities want to see tourism thrive in their local areas so have an incentive to minimize the barriers to responsible and sustainable tourism. Furthermore, licensing is no different in this regard to any other system where the fees cover the costs.

99. Local authorities will each determine their own fees and fee structures to recover establishment and running costs specific to their area. This means that the fees charged by local authority will vary. Relevant factors include whether they can achieve economies of scale, rurality and how they integrate their short-term lets licensing scheme with other housing and licensing functions.

100. Local authorities are expected to differentiate their fees dependent on the characteristics of the short-term let. Scottish Government guidance will state that local authorities should charge a variable fee based on: the maximum number of guests specified on the licence; and whether a property is licensed for (a) secondary letting or (b) home sharing and home letting.

101. To inform our estimate of the cost of introducing the scheme, Scottish Government officials spoke to officials from several local authorities to discuss the tasks and costs involved in establishing and running this scheme: City of Edinburgh Council, Glasgow City Council, West Lothian Council, Argyll & Bute Council, Fife Council and Highland Council. These local authorities were chosen to reflect a mix of urban, rural and island communities^[30], a variety of intensity of short-term let activity and in forecast operating costs; these conversations supplemented useful material provided through the virtual workshops and local authority responses to the 2020 and 2021 consultations.

102. There are eight stages in the consideration of a short-term let licence application:

Step 1. A short-term let host would either:

• submit their application and supporting evidence electronically, or
• post their application and supporting evidence to the relevant local authority licensing team.

In the latter case, this information would be processed by administrative staff and sent to a licensing officer.

Step 2. Administrative staff and licensing officers would review the application and supporting evidence provided by the applicant. If the application or supporting evidence was not complete or contained errors, officials would contact the applicant and request they resubmit or correct their application.

Step 3. A licensing officer would review the complete application and supporting evidence, checking that the applicant had correctly self-declared they met the mandatory licence conditions and relevant conditions that require verification. A licensing officer would also consult with relevant authorities to check the applicant(s) was a fit and proper person.

Step 4. Any objections would be assessed as to whether any additional information was required to inform the licensing decision and, as part of this, whether an inspection would be needed to gather that information.

Step 5. Environmental health officers would consider whether the premises were safe to be operated as a short-term let, as well as the maximum number of occupants the premises could safely accommodate. This may, or may not, involve an inspection.

Step 6. In a control area (or where it was the local authority's policy to do so), planning officers would check whether the property needed planning permission and, if it did, whether it had planning permission.

Step 7. The local authority will decide whether or not to hold a hearing in respect of the application. Where the licensing authority decides to hold a hearing this will be at a meeting of the licensing committee. The licensing committee is likely to consider many licensing applications in one sitting.

Step 8. The applicant will be informed of the decision to grant or refuse their application; where the application is granted, they will be issued with a short-term let licence and relevant documentation, and where it is refused, they will be given the reasons for the decision. Relevant information would be added to the register of short-term lets held by the local authority.

103. Separately, local authorities will carry out monitoring and enforcement action. This will ensure that all short-term lets are licensed and comply with licensing conditions. As part of this, the licensing authority will consider any valid complaints made after the licence is granted. This will sometimes lead to a visit. There may also be some random visits for quality assurance purposes.

104. In addition to handling complaints, local authority staff will also respond to queries about the scheme and update the public register.

105. These ongoing costs also need to be recovered through fees and we have made allowances for these activities in the costing.

106. Most local authorities indicated that a licence was likely to be issued for three years and the host or operator would then be able to renew their licence for further three year periods. The costing is based on this assumption. (Note that some local authorities might choose to issue shorter licences on first application for some or all licences.)

107. There may be some modest reduction in the work required to consider a renewal application compared with a first licence application for the following reasons:

• the applicant should be more familiar with the licensing process and more likely to submit a complete and correct application first time;
• some of the checks at first application may not need to be repeated (e.g. around planning control); and
• fewer applications should raise objections or require committee consideration, as problems arising in the first licence period should already have been addressed.

108. There a number of factors that could lead to a significant degree of variation in the cost to local authorities, principally:

• Rurality – rural local authorities would find it relatively more time consuming and costly to visit accommodation to check compliance with licence conditions than urban local authorities. The more premises that local authorities decide to visit as part of the application process, the more this increases the cost of processing licence applications. However, the Scottish Government wants local authorities to take a proportionate, risk-based approach to inspections which will help to manage costs.
• IT systems – a system which allowed on-line submission of applications and put them into the workflow would reduce staff time and costs significantly, not least through reducing applicant errors and manual data entry. Whether this was the intention of the licensing teams with whom Scottish Government officials spoke depended on a number of factors including: the capacity and flexibility of the current IT systems; whether new requirements could be brigaded with any scheduled upgrade; and the level of investment merited by the anticipated volume of applications. Any additional investment in IT systems could affect both the establishment cost (higher) and the running costs (lower) due to reduced staff requirements.
• Accuracy of applications – a significant number of licence applications and renewals for current licensing schemes need to be resubmitted due to errors (an on-line application portal can help reduce this with built in verification). This varies by licence type and across local authorities, making it difficult to quantify precisely how this would affect a short-term lets licensing system. Errors have a significant bearing on processing times and, consequently, the cost of licence applications and renewals. Two different assumptions relating to error rates are included in our costings.
• Objections and complaints – concerns were expressed by a number of licensing officials as to the number of objections and complaints, genuine or vexatious, that might be made about applications or operations, and in turn the workload implications for licensing committees. Objections and complaints have the potential to increase costs significantly. Volumes might vary by type of short-term let and concentration of activity and accommodation, so the intensity might vary across local authorities. Removal of overprovision as a consideration in licensing^[31] is likely to lead to significantly fewer competent objections and complaints on licensing grounds than would otherwise have been the case.
• Turnover rate – the rate at which short-term let accommodation exits the sector and is replaced by new short-term lets will have a significant bearing on the number of applications and renewals that local authorities receive and, in turn, staffing implications. It is difficult to estimate this accurately due to a lack of historic data on the turnover rate and the fact that the market had not reached an equilibrium point (prior to COVID-19). In any event, if the turnover rate increases, while more staff would be required to process licence applications, there would also be additional fee income to pay for these staff.
• Composition of sector – any changes in the composition of the sector over time, whether due to the introduction of fees or other economic trends, could affect the costs and revenues of local authorities. Local authorities may therefore need to adjust fees from time to time to ensure that they remain appropriate.
• Compliance – the level of compliance with licence conditions, and in turn implications for monitoring and enforcement staffing requirements, is hard to estimate before the licensing scheme is established. We have costed two different assumptions about the level of monitoring and enforcement required, depending on the level of compliance.

109. For these reasons, it is not possible to be precise about the cost of the licensing scheme, and how this will vary by local authority; therefore we have presented ranges for different scenarios.

110. While factors such as objections and complaints, and accuracy of applications are outwith the control of licensing authorities, one of the key factors that will impact the cost to applicants, and is within the control of licensing authorities, is the inspection regime they adopt. Where licensing authorities choose to carry out more desk-based checks, and fewer physical property inspections, we expect this will significantly reduce their costs in running licensing schemes in their areas and, as a result, reduce the licence fees for applicants.

111. We want licensing authorities to allow applicants to self-certify adherence with mandatory conditions on application, and only to use inspections as part of a risk-based, intelligence-led approach. Applicants would be breaching their licence conditions if it transpires later that they are not in compliance. We propose to set out in guidance the relevant factors for licensing authorities to consider in deciding whether to carry out an inspection of particular premises.

112. To illustrate the impact of different approaches to inspections, we have presented figures across five rates of inspection of premises (10%, 25%, 50%, 75%, 100%). We do not believe that a proportionate licensing regime requires all premises to be physically inspected, but for completeness we have included 100% as a scenario to illustrate the impact of such an approach. For each of these inspection rates, we have presented a low cost and a high cost scenario to take into account various factors such as rurality, and levels of objections and complaints.

113. The costs set out in this BRIA reflect the Scottish Government's best estimate of average costs and fees across Scotland for a low cost and high cost scenario at different inspection rates but the actual average costs will depend on local conditions, and thus could be higher (or lower) than this in some local authorities. Furthermore, as local authorities should differentiate their fees depending on the characteristics of the short-term let, the actual fee charged to any particular host could be significantly different to any numbers set out in this BRIA. Hosts and operators should not interpret the average fee presented in this BRIA as being the specific fee they will be charged.

F1. Low operating costs scenario

114. Under this scenario, it is assumed that:

a) Accurate information - Applications are submitted with the correct information and do not need to be resubmitted.

b) Low level of objections, queries and complaints - a small proportion of applications (10%) attract objections or complaints, genuine or vexatious, or require a licensing committee to determine whether a licence should be granted.

c) Low monitoring and enforcement costs - staffing resource for monitoring and enforcement is based on inspecting 5% of all licensed properties (after approval, and during their licence term) and one hour (combined) of officer and admin time throughout the licence term per licence.

115. There is more information about the assumptions underpinning scenario 1 at Annex A

F2. High operating costs scenario

116. Under this scenario, it is assumed that:

a) Inaccurate information - A significant proportion (50%) of applications and renewals are submitted with errors, or require further information, and need to be resubmitted. This will take up more staff time as administrative staff and licensing officers will need to liaise with short-term let hosts to collect correct information.

b) Significant level of objections, queries and complaints - a larger proportion of short-term let applications (20%) attract objections or complaints, genuine or vexatious, or require a licensing committee to determine whether a licence should be granted.

c) Higher monitoring and enforcement costs - staffing resource for monitoring and enforcement is based on inspecting 10% of all licensed properties (after approval, and during their licence term) and two hours (combined) of officer and admin time throughout the licence term per licence.

117. There is more information about the assumptions underpinning scenario 2 at Annex A.

F3. Assumptions common to both scenarios

118. As part of the initial application process, inspections of premises are included at five rates across both scenarios:

a. 10%;

b. 25%;

c. 50%;

d. 75%; and

e. 100%

119. We have assumed the following in every case:

a) applications and renewals are submitted by post and not submitted digitally;

b) administrative staff will process incoming paper licence applications and renewals (the use of paper-based applications is deliberately chosen as a pessimistic assumption and might be expected to overestimate the costs slightly, see Annex A for more detail);

c) the average gross annual salary of an administrative member of staff is £23,500 and this is inflated by 30% to account for other staff-related costs such as staff IT, facilities and national insurance contributions;

d) the average gross annual salary of a licensing officer is assumed to be £35,000 and this is inflated by 30% to account for other staff-related costs such as staff IT, facilities and national insurance contributions. This salary is also used for other staff operating at officer level, including planning and environmental health officers;

e) the average gross annual salary of a solicitor is assumed to be £42,500 and this is inflated by 30% to account for other staff-related costs such as staff IT, facilities and national insurance contributions;

f) the average gross annual salary of a senior solicitor is assumed to be £50,000 and this is inflated by 30% to account for other staff-related costs such as staff IT, facilities and national insurance contributions; and

g) licences will be granted for three years on application and renewal.

120. Note that the size of the sector, i.e. the number of short-term lets in Scotland or in any given local authority area, does not affect the model. This is because we have not modelled establishment costs (such as the introduction of an IT system) so we have not assumed any fixed costs to be spread over number of applications. We have not modelled costs of establishing an IT system because of the wide variation in estimates and approaches likely to be taken by different local authorities. However, as set out in Annex A, our costings take the conservative approach of allowing for manual processing of applications; one might expect the costs of installing an IT system to be offset by time savings against manual processes.

121. We have made no provision for temporary exemptions in the model; we would expect the costs and fees associated with considering temporary exemption applications to be much lower on average.

F4. Licence fees

122. Table 7, below, outlines the application and renewal fee that would need to be charged to cover the running costs, as set out under our hypothetical scenarios. It assumes that short-term let applications are made every three years. These are average, indicative amounts, expressed both as an upfront cost as well as on an equivalent annual basis (in brackets) when spread over the three year duration of the licence.

Table 7. Indicative average licence fees across all local authority areas and all types of short-term lets for five inspection rates and a low cost and high cost scenario

Inspection rate	Low cost scenario	High cost scenario
10%	£214 (£71)	£352 (£117)
25%	£223 (£74)	£366 (£122)
50%	£237 (£79)	£390 (£130)
75%	£252 (£84)	£413 (£138)
100%	£266 (£89)	£436 (£145)

Note: Figures in brackets show the fees on an annualised basis, i.e. spread over the three year duration of the licence.

123. Renewal fees could be expected to be lower than initial application fees due to a number of factors set out at paragraph 107 above. We expect renewal fees to be approximately £43 cheaper per application in the low cost scenario, and £77 cheaper per application in the high cost scenario.

124. Scottish Government guidance will state that local authorities should use a tiered fee structure^[32] based on the type of licence (with lower fees for a home sharing and home letting licence than for a secondary letting licence) and guest capacity. This is to ensure that the fees for the licensing scheme are affordable for smaller premises. In terms of the likely revenue generated by a short-term let, relevant factors include: location, the size of the property or premises, and seasonality. Large party houses can generate significantly more income than a small two-bed self-catering property. Secondary letting will typically yield greater income than home sharing (or home letting for limited periods).

125. Some stakeholders expressed concern that, from a cash flow perspective, paying a fee upfront for three years could be challenging. Local authorities have the power to introduce an annual fee instead of an upfront application fee, should this be a problem. But we expect the licence fee to be broadly in proportion to the scale of the business and therefore a manageable cost.

126. According to Airbnb, in 2018 the average (median) earnings of a typical host in Scotland was £3,800^[33]. The majority (57%) of Airbnb listings are let for less than 60 nights^[34], and so hosts earning close to the median earnings are likely to be letting for fewer than 60 nights. Earnings will be significantly higher for listings with year-round availability. Earnings will also likely be higher for secondary letting (i.e. of whole properties).

127. The vast majority of Airbnb hosts are responsible for a single listing^[35], and therefore will only need to apply for a single licence. Spreading the cost of the fee over its three-year life, the application fee will be equivalent to around 1.9% to 2.3% of average earnings under the inspection rates set out in Scenario 1 and around 3.1% to 3.8% under the rates set out in Scenario 2. It would constitute a smaller percentage to the extent that hosts are able to pass on the fee to guests.

128. Some stakeholders commented that we had not considered those earning less than the average in the 2021 draft BRIA. However, those hosts are likely to be taking fewer guests and therefore paying a lower licence fee, under the Scottish Government's recommended tiered fee structure.

129. By way of further comparison, according to a Frontline study carried out for the ASSC, which included a survey of self-catering operators, the average turnover in 2019 per operator was £47,318 (253 operators provided turnover data for 2019)^[36]. The report does not break this figure down into total income per property. But it does suggest that the average number of properties per operator is 2.3 (329 operators replied to this question)^[37].

130. These two figures suggest an average (mean) income per property of £20,573, with the caveat that the number of operators responding to the two questions differed. Spreading the cost of a fee over its three-year life, the application fee would be equivalent to 0.3% to 0.4% of average income under the inspection rates set out for Scenario 1 and 0.6% to 0.7% under the inspection rates set out for Scenario 2.

131. The percentage of earnings that the fee will comprise for an individual host or operator may differ from this average depending on the particular fee charged by a local authority, as well as the rates charged to guests by the host. For example, a tiered fee system in line with forthcoming Scottish Government guidance would set lower fees for home letting and home sharing and for smaller premises which can accommodate fewer guests. This will mean that the licence fee as a percentage of income may be lower on average than set out in paragraph 127 for Airbnb hosts, but higher on average than set out in paragraph 130 for self-catering operators, bringing these two estimates closer together. This is because Airbnb listings are likely to comprise a higher proportion of home letting and home sharing which accommodates fewer guests on average, while operators responding to the ASSC/Frontline survey are more likely to provide accommodation which can accommodate a higher average number of guests^[38].

132. Furthermore, local authorities have been given a power in the Licensing Order^[39] to grant exemptions to short-term let hosts for a specified period of up to six weeks in any period of 12 months. This might be used to manage peak demand for accommodation in their area because of a large event, for example. We have not factored exemptions into the cost and revenue model: it would have both cost and revenue implications and local authorities would need to ensure that these balanced out if they remove significant numbers of short-term lets from their licensing scheme.

133. Note that conditions can be attached to an exemption, as needed, so there may be some compliance costs. But note that fees can be charged for an application for a temporary exemption too.

F5. Comparison with landlord registration and HMO fees

134. Licensing for short-term lets has some similarities with landlord registration and HMO licensing. Some local authorities have indicated that they might expect the fees to lie somewhere between landlord registration and HMO licensing.

135. Landlord registration fees are set nationally at £67 plus £15 for each property^[40], making the lowest fee £82 for one property. This cost is incurred once every three years.

136. Local authorities are responsible for the fee structure and approach in respect of HMO licensing. The Scottish Government's statutory guidance for local authorities on licensing of HMOs includes guidance on the charging of fees to cover the costs of licensing in their area. Fees vary across local authorities because of the numbers, sizes and nature of their HMO properties and according to their strategic priorities set to address their specific housing challenges. For example, the lowest fee in Edinburgh only covers three occupants, whereas some local authorities charge a flat fee regardless of number of occupants. The lowest fees for an HMO licence in each local authority area are set out at Annex B. The lowest fee charged for a new application for an HMO licence varies by local authority from £234 to £1,916 across Scotland. HMO licences are granted for up to three years, so the annual equivalent cost will depend on the licence duration.

137. City of Edinburgh Council has published information about its costs and revenues across all of its licensing functions^[41]. The Local Government Association has published guidance on locally set licence fees including on what factors a local authority may wish to consider including in a licence fee^[42]. From the factors that could lead to a significant degree of variation in the cost to local authorities, from their legitimately different policy aims and from experience of HMO licensing, it is to be expected that there will be significant variation in the fees for licences for short-term lets across Scotland.

F6. Costs of mandatory licensing conditions

138. The mandatory licensing conditions, and associated costs for a typical two bedroom property, are set out at Annex C. Some of the conditions are required by existing legislation, and hosts should therefore be in compliance. The remaining conditions are in line with best practice, and responsible hosts should therefore already be incurring and managing these costs. Therefore, in general, these conditions should not result in additional costs, or at most very modest costs. Hosts will also need to complete a licensing application form; the Scottish Government's guidance for hosts will facilitate this.

139. Planning application and CLUD costs are set out at Annex C1.

140. Information from a snap survey by the ASSC is set out at Annex C2. That survey purports to show the high cost of compliance with basic safety and other requirements at present and therefore the challenge of adding a licence fee to the cost of business. The survey appears to be a significant overestimate of the cost of doing business (with the inclusion of one-off or infrequent costs as annual costs); arguably, it also demonstrates that, for these businesses, there are no additional compliance costs deriving from the mandatory conditions of the licensing scheme. However, we have taken relevant data from the survey to set indicative cost ranges in Annex C.

141. Some stakeholders were critical of using a two-bedroom property as the basis for calculating the compliance costs at Annex C. However, the Frontline report commissioned by ASSC showed that two bedrooms is the most prevalent form of accommodation even in the self-catering sector^[43].

F7. Costs of planning application

142. Costs related to planning are set out at Annex C1. Planning consent for a change of use might be expected to cost the applicant in the region of £520 to £1,000. It should be noted that this one-off cost only applies if a local authority requires planning approval for use of the property as a short-term let. Where this condition arises from existing planning law, these costs are already part of the business as usual. Where the requirement arises because of the designation of control areas, then these costs only apply where there are concerns that short-term lets are imposing significant negative impacts on local communities.