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Hotels, Guesthouses And Motels
Are Trading – Aren’t They? 

By Mark McLaughlin 

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Mark McLaughlin speculates whether the general trading status of hotels, guesthouses and motels may soon come under HMRC’s scrutiny.

The question whether an individual’s activities constitute a ‘trade’ or a ‘business’ can be an important one for tax purposes. For example, loss relief against the taxpayer’s other income (i.e. ‘sideways’ loss relief) is generally available in respect of trading losses, but not rental property business losses.

Holiday cottages

In the recent case Nott v Revenue & Customs [2016] UKFTT 0106 (TC), the taxpayer owned an estate including a ‘manor’ house, gardens, a farmyard area which included working farm buildings, and holiday accommodation units. There were eight units in total on the estate, six of which were holiday ‘cottages’. The taxpayer owned all but one of the six cottages (the other was owned by his sister). There were two residential cottages on the estate, one of which was occupied by the taxpayer as his home.

The holiday cottages were generally let for two weeks or less. Cooked breakfasts were offered, usually for an additional charge. A daily cleaning service was also offered, on request and for an additional charge. Other facilities available to guests included: recreational grounds; a ‘working farm’ environment including guided tours for children; a ‘concierge’ service; a pool and pool house; and a games area.

Following an enquiry into the taxpayer’s tax return for 2009/10, HMRC concluded that the income from the holiday cottage complex was property income from furnished holiday lettings, such that losses from that activity could not be set against the taxpayer’s income from other trades for Class 4 National Insurance contributions purposes (n.b. sideways relief for such losses also generally ceased to be available for income tax purposes from 2011/12). The taxpayer appealed.

Trading or property income?

In considering whether the income from the holiday cottage complex was trading or property income, the First-tier Tribunal was referred to several cases. The taxpayer and HMRC both argued that case law identified two factors which should be given particular weight in distinguishing property and trading income; firstly, whether the taxpayer was in occupation of the property; and secondly, the level of services provided to guests by the taxpayer in relation to that property.

On the first issue of occupation, the tribunal concluded that the taxpayer did not ‘occupy’ each of the units. The taxpayer had contended that the estate, including the units, should properly be viewed as a single parcel of land, of which he was the occupier. However, the tribunal considered that argument unsustainable, because the estate was not comprised solely of the units. On the second issue of the additional services provided, the tribunal considered that they were largely consistent with the services normally provided by a landlord of furnished holiday accommodation. The taxpayer’s appeal was dismissed.

A worrying comment

The taxpayer in Nott also argued that his activity was, in all material respects, indistinguishable from that of many hotels and bed and breakfast establishments. The tribunal noted that some hotels provide very little in the way of additional services, while at the other end of the spectrum luxury hotels have available to rent self-contained properties within their grounds. The tribunal commented: ‘We would observe in passing that HMRC’s practice of treating all hotels and bed and breakfasts as trades may be unduly simplistic.’ Whilst this comment was obiter, and although decisions of the First-tier Tribunal do not create a binding precedent, it is a potentially worrying observation, as it could encourage HMRC to challenge the trading status of such establishments.

Practical Tip:

The tribunal considered that some ‘guiding principles’ were derived from authorities summarised in Maclean v Revenue and Customs Commissioners [2007] STC (SCD) 350. One such principle offers a helpful clue on establishing a trade: ‘Activities over and above the mere exploitation of heritable property or turning to profitable account the land, of which he is the owner, may be significant enough to classify a man’s business as a trade. Whether the provision of services or other activities are significant enough to cross the line between land ownership and commercial enterprise in land is a question of fact and degree depending upon the nature and extent of the operations or activities concerned’ (emphasis added).