Is your FHL business “trading” ahead of April 2025?

Introduction

There is no statutory definition of trade for tax purposes. Instead, HMRC will look at the well-established badges of trade in cases where the existence of a trading activity is not clear. In respect of property letting businesses, the rental activity and income are always treated as activities and proceeds from an investment, i.e. derived from the holding of land.

The only exception to this is where the property qualifies as a furnished holiday let (FHL). The activity is treated as a special kind of trade in recognition that these businesses are really a hybrid between an investment business and a trade.

Multiple activities

However, an important point to remember is that a business can have several activities, and the whole operation must be looked at together. A “trade” has a more restrictive meaning than “business”, but can be thought of as the exchange of money etc. for goods or services that can be consumed. In contrast, merely renting a plot of land gives a limited right to occupy it. This is a little simplistic, but a useful starting point. HMRC’s approach is that a business can be a trade as long as the non-trading activities are not “substantial” in comparison to the trading activities.

The non-trading activities in the context of this article will be the property letting. In order for a trade to exist, you will need to be providing something else. However, it is possible that in some circumstances a property letting business may qualify as a trade based on the facts pertinent to it.

What is substantial?

For a long time, HMRC has adopted the view that “substantial” in the context of business asset disposal relief (BADR) means more than 20%. In practice it has applied this test to asset value, turnover, profits, length of ownership and employee costs. If the non-trading activities and related assets exceed 20% when looked at under any of these headings, the answer would be “no trade”.

However, in recent years the tribunals have favoured a more rounded approach, i.e. looking at all of the activities together and forming a view based on the whole picture. In Allam v HMRC [2021] UKUT 291, the Upper Tribunal rejected the application of a 20% approach in favour of a holistic approach not confined to physical activity. HMRC’s guidance was subsequently updated, with the 20% test only being relevant when looking at asset values and turnover. Notwithstanding this, any intent to show a business that involves letting property is trading will need to have significant other activities to tip the balance. These will usually constitute services that are over and above what would usually be expected from a landlord-tenant relationship - even where the letting is short term. Let’s look at the badges of trade and how they might apply in the context of services.

Nature of the service

The nature of the service provided can be a significant indicator of whether a trade exists. Services that are commonly provided on a commercial basis are more likely to be considered trading activities. For example, in the case of a charity providing care and support to sufferers from epilepsy, the tribunal held that the construction costs of a new facility would qualify for zero-rating because the charity was not carrying on a commercial activity.

Period of ownership

While the period of ownership is more relevant to tangible assets, the duration for which a service is provided can also be indicative. Long-term contracts or ongoing service agreements may suggest a more stable, investment-like activity, whereas short-term or one-off services may indicate trading. For instance, in the context of VAT, the execution of statutory repair works by a local authority was held not to constitute a business activity because the service was being carried out by the authority in its capacity as a public body.

Frequency and number of transactions

A high frequency and number of similar service transactions can indicate trading. For example, a company offering a service whereby office workers could email their sandwich orders and have them delivered by van was held to be providing a zero-rated supply of food, not catering, due to the nature and frequency of the transactions.

Supplementary work

If significant work is done to enhance the service provided, this may indicate trading. For instance, in the case of a taxpayer advertising and selling surplus government aircraft linen, the efforts to advertise and employ salespeople indicated trading.

Circumstances of sale

The manner in which a service is sold can also indicate trading. If the sale involves significant effort to find clients or create a market, this may suggest trading. For example, in the case of a company providing subsidised school transport, the Court of Justice of the European Union held that there was no genuine link between the amount paid and the services supplied, indicating that it was not an economic activity.

Motive

The intention behind providing the service can be a deciding factor, especially when other badges are inconclusive. In the case of a charity providing water-sports-based activities, the Court of Appeal concluded that the correct question to ask is whether there is a direct link between the consideration received and the service provided.

Back to the business

In order for your business to be a trade, it will be necessary for the services provided alongside the letting activity to be very substantial, taking into account the factors discussed above. It is unlikely that simply letting a number of individual properties will qualify, even if you are, e.g. providing meals, linen, cleaning services, etc. However, if you own a holiday park where all the accommodation is on one site, there may be more scope to claim there are more substantial trading activities, particularly if there is provision of, say, entertainment, leisure facilities, organising days out, food and drink. Even so, there would need to be a careful examination of what the revenue and cost centres are to enable an analysis of whether these are substantial enough for a trade to exist.

Do not attempt mere window dressing in an effort to prove a trade exists. For example, charging £100 per night, broken down as £1 for accommodation and £99 for clean towels won’t go down well with HMRC.

One thing you could do if they have a holiday park is offer different levels of package, i.e. from just accommodation with extra charged for access to other facilities up to all inclusive packages. It should be straightforward to break down the revenue from trading/non-trading activities by comparing the respective prices. If you are successful in arguing that you are trading, the result will potentially be better than the FHL rules are, as any losses can be utilised in a far more flexible way. However, don’t forget that if the business is unincorporated, trading profits will fall within the remit of Class 4 NI, which isn’t the case for a property business.