Non-domestic rates/Council Tax second and empty homes consultation: business and regulatory impact assessment

Consultation

Within Government

More Homes Division has worked closely with the following Scottish Government policy and analytical teams to develop the consultation paper and impact assessments:

• Better Homes Division
• Local Government and Analytical Services Division
• Tourism, Hospitality and Retail Division
• Communities Analysis Division
• Devolved Taxes, Directorate for Tax and Revenues

Public Consultation

A public consultation is being undertaken for 12 weeks from 18 April to 11 July 2023.

We have also informally consulted with COSLA during the development of the proposals and will continue this engagement during the consultation. This also includes discussions with the Institute of Revenues Rating and Valuation Scotland, and Scottish Assessors Association.

Business

The Scottish Government engages regularly with business organisations and stakeholder groups. The consultation will be shared widely with all interested parties and businesses will have the opportunity to provide views in response to the consultation.

Our intention is to engage with interested businesses and business representative organisations via established forums/ groups, including:

• The Industry Advisory Group facilitated by Visit Scotland and comprising representation from Association of Scottish Self Caterers, Scottish B&B Association, Scottish Tourism Alliance and Short Term Accommodation Association
• short-term lets platforms such as Expedia, Airbnb, booking.com etc
• Scottish Ratepayers Forum
• Scottish Ratepayers Surveyors Forum
• Industry Leadership Advisory Group

Options

We are consulting on whether councils should have additional powers to enable them to use taxation as one of the tools to manage numbers of second and long-term empty homes in their areas. We are also inviting views on whether the current non-domestic rates thresholds for self-catering accommodation should change, and/or if councils should have any discretion to alter them.

This partial BRIA considers the impact of the following options:

1. Do nothing

2. Provide councils with powers to charge up to a 100% premium on second homes

3. Provide councils with powers to charge more than a 100% premium on second and long-term empty homes

4. Alongside option 2 and/or 3, in relation to non-domestic rates:

a. alter the thresholds for classifying self-catering accommodation for non-domestic rates purposes (the number of days accommodation must actually be let and available to let)

b. provide councils with powers to use discretion to alter the self-catering accommodation threshold which applies locally for the number of days the accommodation must actually be let

Option 1 – Do Nothing

Sectors – costs and benefits:

Local councils and services

• councils would continue to benefit from revenue raised by taxing second homes. In 25 out of 32 councils, second home owners pay the full rate of council tax. In the remaining seven councils, they receive a 10% discount off the full rate
• in 2021-22 the reduction or removal of the discount on council tax on second homes across Scotland generated over £20m
• councils would continue to benefit from revenue raised from their discretionary power to vary the council tax on empty homes from the baseline discount of 50%; in 2021-22, this raised a total of around £28m, of which around £15m was from the additional discretionary power to remove the discount altogether or a charge a premium of up to 100%
• councils ringfence some of the revenue^[10] generated from second and long-term empty homes for affordable housing purposes
• second homes used as self-catering accommodation and let for more than 70 days and available to let for 140 days each financial year, would remain eligible for non-domestic rates. Most qualify for up to 100% Small Business Bonus Scheme relief, and therefore continue to pay no or very little local tax

Local communities

• while the majority of self-catering accommodation receives 100% relief on non-domestic rates and pays no local tax, the local economy may benefit in other ways. For example, through the employment of local cleaning and laundry services, and the spend in local shops, hospitality venues and visitor attractions from guests staying in the accommodation

Option 2 – Provide councils with powers to charge up to a 100% premium on second homes

Sectors and groups affected:

• second home owners
• self-catering accommodation providers
• local councils and services
• local communities

Costs and benefits:

This option would require a change to regulations but could be achieved without primary legislation.

Second home owners

• if they are charged the full premium, their council tax amount would double. This would affect their disposable income. We know second home owners are on average wealthier than households that do not own a second home or those without any property
• depending on personal circumstances they may be able and willing to pay the additional cost of the premium without changing how they use their second home
• some may decide to change how they use their second home by letting it on a long-term basis as a private rented tenancy (liability for council tax would then switch from the owner to the tenant payable at the normal rate for the tax band)
• some may decide to change how they use their second home by letting it as self-catering accommodation on a short-term basis or increase the frequency of short-term letting. If let for more than the minimum number of days required to qualify for non-domestic rates, council tax would no longer be applicable and they would be liable for non-domestic rates. While the gross liability is generally higher for non-domestic rates than it is for council tax, if the rateable value is low enough, the premises may be eligible for Small Business Bonus Scheme relief and receive up to 100% non-domestic rates relief
• the home may be sold. Any legal, marketing and capital gains tax costs incurred may be offset depending on the sale price and whether the value of the accommodation has substantially increased since it was purchased

Self-catering accommodation providers

• there would be no impact for second homes used for this purpose that already meet the minimum thresholds to qualify for non-domestic rates
• for second homes used for this purpose but for less than the threshold, providers may opt to slightly increase the number of days they are let/ available in order to avoid paying the council tax premium and become liable for non-domestic rates. If the rateable value is low enough, the premises may be eligible for Small Business Bonus Scheme relief and receive up to 100% non-domestic rates relief
• in July 2022, 96% of those in receipt of SBBS (16,130) on non-domestic rates benefited from 100% relief and paid no local tax
• Scottish Assessors enter self-catering accommodation on the valuation roll if it has met the minimum thresholds. No data is available to provide an analysis of the number of days self-catering accommodation on the valuation roll is actually let and available to let

Local councils and services

• councils already have powers to apply different council tax charges to second and empty homes in different parts of their local areas. This could help them target a premium to the areas with specific concerns. It could equally ensure they take into account the contribution second homes can make to the area through tourism
• the maximum councils could charge second and long-term empty homes would be the same (100% premium)
• in 25 out of 32 councils, second home owners already pay the full rate of council tax
• in the remaining seven councils, they receive a 10% discount off the full rate
• if a 100% premium was added to council tax on all second homes across Scotland this could generate around £35m^[11] in additional council tax but this figure assumes no behavioural change as a result of increased council tax charges
• in the administration of non-domestic rates, councils may see an increase in self-catering accommodation on the valuation roll and liable for non-domestic rates
• Scottish Assessors may see an increase in self-catering accommodation premises to be entered on the valuation roll if it has met the minimum thresholds

Local communities

• if councils use their discretion to apply the premium in areas of housing need, second homeowners may be influenced to use their accommodation differently. For example, by operating a private residential tenancy. If used in conjunction with private leasing schemes through the council, this could provide more affordable housing for key workers and social tenants
• councils would need to carefully consider the possible impact of a premium if the outcome might switch second homes from being used occasionally for owners' personal use or self-catering accommodation, to empty homes if this was a more favourable rate (even in the short term)
• if second homes were used more often, either as private residential tenancies or self-catering accommodation for more of the year (where councils felt this outcome would be desirable), local communities and economies could benefit from increased spend in the local area

Option 3 – Provide councils with powers to charge more than a 100% premium on second and long-term empty homes

Sectors and groups affected:

• second home owners
• self-catering accommodation providers
• empty home owners
• local councils and services
• local communities

Costs and benefits:

This option would require primary legislation.

Second home owners and self-catering accommodation providers

• second-home and self-catering accommodation owners would be affected in a similar way to option 2
• however, if councils chose to charge a higher premium this would have a greater impact on disposable incomes and profits
• if owners did not wish to stop using their second home for personal use, this may increase the likelihood of second homes being used as self-catering accommodation for relatively small amounts of the year (70 days) in order to qualify for non-domestic rates (and may qualify for SBBS, which could mean no local tax is paid)

Local councils and services

• the maximum premium councils could charge would be higher for both second and long-term empty homes
• councils could choose whether or not to apply the premium, whether to apply it to all or part of its area and whether to set the same premium for both second and long-term empty homes. This flexibility would enable them to target the action to address the specific problem in their area
• keeping the premium level the same for both second and long-term empty homes could deter owners from seeking to classify their home under the more favourable rate
• if the premium on all second and empty homes in Scotland was increased by 100%, the revenue that could be generated, assuming no behavioural change, could amount to an additional £70m per annum^[12]

Local communities

• a higher premium is even more likely to influence owners to change the way they use second homes (see option 2) and empty homes (see below), with the resulting benefits and risks depending on what choice they make
• there is no guarantee that homes which are sold will be used differently by the new owner but higher premiums ultimately mean more revenue for local areas

Empty home owners

• owners could still ask councils to take their circumstances into account before applying a premium. For example, if a home has been empty between 12-24 months and repair work is ongoing to make it habitable or the home is actively being marketed for sale or let. However, the amount of time a home has been empty is based on the accommodation and not how long it has been owned. This may disincentivise prospective buyers from purchasing long-term empty homes, if they will be subject to council tax premiums immediately
• some reasons, for example that the owner can't afford the required repair work, leading to owners leaving their home empty for a long time could be compounded by higher council tax charges and result in the home being left empty for even longer
• higher premiums could equally motivate owners to take action rather than continue to leave the home empty

Option 4 - Alongside option 2 and/or 3,

a. alter the thresholds for classifying self-catering accommodation for non-domestic rates purposes (the number of days accommodation must actually be let and available to let)

b. provide councils with powers to use discretion to alter the self-catering accommodation threshold which applies locally for the number of days the accommodation must actually be let

Sectors and groups affected

• second home owners and Self-catering accommodation providers
• local councils and services
• local communities

Costs and benefits

Options 4(a) and 4(b) would both require regulations but could be achieved without primary legislation.

Second home owners and self-catering accommodation providers

• to be liable for non-domestic rates second homes owners letting their property as self-catering accommodation would need to meet the thresholds which apply in the area. If classed as self-catering for non-domestic rates and if the rateable value is low enough, the premises may be eligible for Small Business Bonus Scheme relief and receive up to 100% non-domestic rates relief
• if thresholds were increased and could not be met, the second home or self-catering accommodation would either remain liable for council tax or be removed from the valuation roll and become liable for council tax. This may impact on the use of second homes and self-catering accommodation available in an area
• the 'number of days actually let' threshold may vary across councils, which could impact on behaviour in particular areas. This might mean prospective buyers could be drawn to councils with lower thresholds that create a more favourable operating environment
• different thresholds across council areas arising from discretionary powers, could be confusing

Local councils and services

• councils could use discretionary powers to alter the actual days let threshold for non-domestic rates to better reflect local need and circumstance
• altering the threshold may incur additional administration costs for councils. It could also impact on revenues raised through council tax and/or non-domestic rates

Local communities

The thresholds which apply for the purposes of non-domestic rates may influence how second home-owners use their homes

Scottish Firms Impact Test

The firms most affected by the proposal to alter the threshold for non-domestic rates are businesses providing self-catering accommodation. If the threshold is raised some businesses will revert to council tax as domestic accommodation.

During the consultation phase we will engage with tourism bodies and short-term let platforms such as AirBnB, Booking.com and Expedia discuss the costs and benefits of options set out in the partial impact assessments published as part of the consultation.

Competition Assessment

The proposed measures may increase the level of competition within the Scottish accommodation sector. This could happen in a couple of ways. Second home owners may change the use of their accommodation from personal use to become a private rental landlord or short-term let host.

However, if the thresholds to claim non-domestic rates are raised, some second home owners may not be able to meet these and/ or decide to sell their home rather than increase its use as self-catering accommodation or pay a premium charge on council tax. Raising thresholds, on their own, could therefore reduce the number of suppliers within the accommodation sector. However, demand for short-term lets in Scotland has grown over the past decade, and they remain a favoured form of holiday accommodation. We believe that any impact on competition from a change in thresholds will not be material relative to these overall trends. This conclusion is supported by the point that any impact from changing thresholds needs to be considered in the context of other policy changes relating to empty and second homes which, as just discussed, may increase competition. Furthermore, giving councils discretion to apply different elements of the proposed changes will allow them to assess the overall impact of the total package of measures on levels of competition.

• Will the measure directly or indirectly limit the number or range of suppliers? No
• Will the measure limit the ability of suppliers to compete? No
• Will the measure limit suppliers' incentives to compete vigorously? No
• Will the measure limit the choices and information available to consumers? No

Consumer Assessment

The Scottish Government definition of a consumer is "anyone who buys goods or digital content, or uses goods or services either in the private or public sector, now or in the future".

In the context of second homes, if the second home is let out as self-catering or private rental tenancy accommodation, the consumer is primarily the guest or tenant. However, if second home owners decided to sell their property as a result of the legislation, this would lead to the consumer being those looking to purchase a property on the housing market.

If legislation encouraged second homes to be used more often this might provide more choice for consumers such as guests or tenants.

In terms of the consumer assessment questions:

• Does the policy affect the quality, availability or price of any goods or services in a market? Yes
• Does the policy affect the essential services market, such as energy or water? No
• Does the policy involve storage or increased use of consumer data? No
• Does the policy increase opportunities for unscrupulous suppliers to target consumers? No
• Does the policy impact the information available to consumers on either goods or services, or their rights in relation to these? No
• Does the policy affect routes for consumers to seek advice or raise complaints on consumer issues? No

Test run of business forms

It is not anticipated that new forms will be introduced as a result of the proposals.

Digital Impact Test

The changes being consulted on would not change administrative practices significantly. Responsibility over the collection and processing of information pertaining to the changes rests with assessors and councils, such processes would not require change. Further, billing systems and valuation practices would facilitate changes to the percentages or thresholds.

Legal Aid Impact Test

During the consultation phase we will consider whether the proposals will have any legal aid implications.

Enforcement, sanctions and monitoring

This would be in line with existing council tax and non-domestic rates practice.

Implementation and delivery plan

Subject to the outcome of the consultation, the proposals to enable a premium up to a 100% to be charged on second homes could be delivered using secondary legislation. Subject to Parliamentary agreement the earliest we anticipate new powers to charge up to a 100% premium on second homes could take effect would be the 2024-25 financial year.

Changes to introduce premiums beyond 100% on both types of homes would require primary legislation.

Post-implementation review

During the consultation phase, we will continue to consider enforcement, sanctions and monitoring implications.