Short-term lets - licensing scheme and planning control area legislation: draft business and regulatory impact assessment (BRIA)

F. Costs to local authorities and recovery through fees

72. 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 are properly a matter for local authorities and the information provided in this BRIA is not to be seen as a requirement on local authorities or a commitment by them to charge fees in any particular way or at any particular level.

73. 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.

74. 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.) Information to be displayed for guests

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

(4.) Listings: ensuring that the licence number, maximum occupancy and EPC rating (where an EPC is required) are displayed on any advert or listing

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

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

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

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

76. 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. 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. 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^[8].)

77. 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.

78. Local authorities can differentiate their fees dependent on the characteristics of the short-term let. For example, a local authority could charge a different 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; this is not an exhaustive list.

79. 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 and Highland Council. These local authorities were chosen to reflect a mix of urban, rural and island communities and the full variation in intensity of activity; these conversations supplemented useful material provided through the virtual workshops and local authority responses to the 2020 consultation.

80. Informed by these conversations and other material, six stages were identified 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 has correctly self-declared they meet 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. Environmental health officers would verify that the property was safe to be operated as a short-term let, as well as the maximum number of occupants the property could safely accommodate. This may, or may not, be through an inspection.

Step 5. 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 has planning permission.

Step 6. Providing the application met the relevant conditions, the applicant would be supplied with a short-term let licence and relevant documentation. They would be added to the short-term let register for that local authority.

81. 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.

82. 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.

83. There may be relatively less work involved in renewing a short-term let licence than an application as some of the checks carried out at the time of application may not need to be carried out again. In addition, the short-term let host may be more aware of the licensing process and be more likely to submit the correct information upon renewal, taking up less staff time. This is reflected in the costing.

84. In addition to the application (and renewal) processing workflow, local authority staff would:

• respond to queries about the scheme;
• manage complaints;
• service licence committee hearings; and
• update the public register.

85. We have made allowances for these activities in the costing.

86. 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. Where local authorities determined that visits were necessary as part of the application process, this would increase the cost of processing licence applications.
• 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).
• 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 varied by licence type and across local authorities making it difficult to quantify 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.
• 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. Complaints and objections 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.
• 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). The higher the turnover rate, the more staff would be required to process licence applications; but more fees would be collected.
• Feedback loop – the fees charged by local authorities may reduce the size of the sector or change the mix of accommodation offered. This could be mitigated by a fee structure that broadly aligned with the revenue from letting activity. Any changes to the sector will feedback through costs and revenues and local authorities may 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.

87. For these reasons, we are unable to be precise about the cost of the scheme, and how this will vary by local authority. To progress, we have devised and costed two indicative scenarios for the time and cost involved in processing an average licence application and renewal.

88. The costs set out in this BRIA reflect the Scottish Government’s best estimate of costs and fees in two plausible indicative scenarios but the actual costs could be higher (or lower) than this in some local authorities. Furthermore, as local authorities can differentiate their fees depending on the characteristics of the short-term let, the actual fee charged to any particular host could be very significantly different to any numbers set out in this BRIA. Hosts should not interpret the average fee presented in this BRIA as being the specific fee they will be charged. The purpose of the BRIA is to provide an indication of likely average costs across Scotland; costs in a particular area will depend on local conditions, which the local authority will take into account when setting their fees.

F1. Scenario 1: lower operating cost

89. Under this scenario, it is assumed that:

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

b) Staff are predominantly desk-based officers are able to check that accommodation meets the mandatory licence conditions through documents, photographs or by digital means. Although inspections are not required, for 25% of applications (either random or intelligence based), an inspection of the property is carried out to ensure compliance and that standards are upheld.

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

d) Low monitoring and enforcement costs staffing resource for monitoring and enforcement is 20% of that to process and approve licence applications, and this is at officer level.

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

F2. Scenario 2: higher operating cost

91. 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) All applications result in an inspection environmental health officers inspect each short-term let premises on application.

c) Significant level of objections, queries and complaints a larger proportion of short-term let applications or renewals (25%) attract objections or complaints, genuine or vexatious, or require a licensing committee to determine whether a licence should be granted.

d) Higher monitoring and enforcement costs staffing resource for monitoring and enforcement is 40% of that to process and approve licence applications, and this is at officer level.

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

F3. Assumptions common to both scenarios

93. We have assumed the following in both scenarios:

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

b) administrative staff will process incoming paper licence applications and renewals (in the longer term, this is a pessimistic assumption and might be expected to overestimate the costs slightly) and notify neighbours;

c) the average gross annual salary of an administrative member of staff is £20,000 and this is inflated by 25% 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 25% to account for other staff-related costs such as staff IT, facilities and national insurance contributions;

e) licences will be granted for three years on application and renewal;

f) no change in the size of the sector, i.e. the number of short-term lets in Scotland would return to 32,000^[9] (see the discussion on trends in section G below), and all apply for a licence;

g) that is to say we have made no provision for temporary exemptions, or consequences of any overprovision policies, in the model.

F4. Licence fees

94. Table 1, below, outlines the application and renewal fee that would need to be charged to recover establishment and running costs, as set out under our hypothetical scenarios. This assumes 32,000 short-term let applications or renewals are submitted and processed in one year, and thereafter on a three yearly renewal cycle. These are average, indicative amounts, expressed both as an upfront cost as well as (in brackets) on an equivalent annual basis when spread over the three year duration of the licence.

Table 1. The average indicative fee for processing an application or a renewal across all local authority areas and all types of short-term lets given the assumptions underlying each scenario. Figures in brackets show the fees on an annualised basis, i.e. spread over the three year duration of the licence.

Scenario	Application Fee	Renewal Fee
Scenario 1	£223 (£74)	£148 (£49)
Scenario 2	£377 (£126)	£249 (£83)

95. Local authorities are unlikely to charge a single, average fee. Table 2 below illustrates how the application and renewal fee (from scenario 2) could, in theory, be varied to offer a discounted fee to low volume hosts. Of course, this fee differentiation could be done in any number of ways and this table is purely illustrative.

Table 2. This shows how the fees could be tailored to offer a specified percentage discounted fee to low volume short-term lets, using four illustrative levels of discount. This is based on the scenario 2 average costs and we assumed that a discount is offered on 40% of short-term lets, being those that are let for less than one month per annum (from evidence published by Airbnb ^[10]). This assumes that any discount would need to be revenue neutral, as such the new fee for the group receiving a discount would be lower than the average fee, and the new fee for everyone else would be higher than the average fee. The difference between these two new fees would be equal to the level of the discount. Figures in brackets show the fees on an annualised basis, i.e. spread over the three year duration of the licence.

Length let:	Low volume		Regular
Discount	Application	Renewal	Application	Renewal
0%	£377 (£126)	£249 (£83)	£377 (£126)	£249 (£83)
25%	£314 (£105)	£208 (£69)	£419 (£140)	£277 (£92)
50%	£236 (£79)	£156 (£52)	£471 (£157)	£312 (£104)

96. By way of comparison, according to Airbnb, between 1 July 2016 and 30 June 2017, the average earnings of a typical host in Scotland was £3,600^[11]. A large proportion of listings were let for less than 30 nights (40%) and so the earnings will be significantly higher for listings with year-round availability. Earnings will also be higher for secondary letting (i.e. of whole properties).

97. Spreading the cost of the fee over its 3-year life, the application fee will be equivalent to around 2% of average earnings under Scenario 1 and 3% under Scenario 2. It will be even smaller (1% and 2% in scenarios 1 and 2, respectively) during renewal phases due to the likely lower fee for renewals compared to applications. It would constitute a smaller percentage to the extent that hosts are able to pass on the fee to guests.

98. The percentage of earnings that the fee will comprise for an individual host may differ from this average depending on the particular fee set by a local authority, which can be affected by any discounts, as well as the rates charged to guests by the host.

99. Furthermore, local authorities have been given a power in the Licensing Order^[12] to grant exemptions to short-term let hosts for a specified occasion or 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 scheme.

100. Note that conditions can be attached to an exemption, as needed, so there may be some compliance costs.

F5. Comparison with landlord registration and HMO fees

101. 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.

102. Landlord registration fees are set nationally at £67 plus £15 for each property^[13], making the lowest fee £82 for one property. This cost is incurred once every three years.

103. 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 as they try to implement their strategic priorities 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 an HMO licence varies from £229 to £1,906 across Scotland. HMO licences are granted for up to three years, so the annual equivalent cost will depend on the licence duration.

104. City of Edinburgh Council has published information about its costs and revenues across all of its licensing functions^[14]. 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^[15]. 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 licenses for short-term lets across Scotland.

F6. Costs of mandatory licensing conditions

105. 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.

F7. Costs of planning application

106. 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 £1000. 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.