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Taxation of HMOs
Taxation for national government is levied on persons (Income Tax)
and on goods & services (VAT or Value Added Tax). Taxation for
local government is levied on properties (what used to be called
the Rates). Properties are divided into two kinds, domestic and
business (under Section 66 of the Local
Government Finance Act [1988]). Domestic properties pay Council
Tax and business properties pay Business Rate (under the provisions
of the Local
Government Finance Act [1992]). In both cases, tax is normally
paid by the user of the property – thus, where a property
is rented, tax is paid by the occupant, not the owner. Some residents
of domestic properties are exempt from Council Tax, including full-time
students, student nurses, the mentally impaired, soldiers, diplomats.
Thus, HMOs (houses in multiple occupation) are liable for Council
Tax. This is payable by the occupants – but if they are students,
for instance, then they are exempt. In this case, no tax is paid
on the HMO.
The National HMO Lobby argues that this situation is unjust, for
three reasons.
(a) The occupancy of student HMOs is (on average) double that of
the average household. Such HMOs therefore make higher than normal
demands on local services – but make no contribution to their
costs.
(b) The revenue lost to local authorities by Council Tax exemption
is reimbursed by national government. But this reimbursement is
drawn from general taxation – which in turn is paid by those
who have already paid Council Tax.
(c) Many local authorities argue that they are not fully reimbursed
(Canterbury estimates that it loses £200,000 a year in this
way).
There are three ways in which this situation could be remedied.
(1) Exemption from Council Tax could be withdrawn from some (or
all) of those currently exempt. This has the virtue of the 'polluter
pays' principle. But it is easily (mis)represented as (for instance)
'anti-student'.
(2) Responsibility for Council Tax could be shifted from occupants
to owners (landlords) in the case of HMOs. This puts responsibility
for the Tax on those who are making the money. But it makes HMOs
unique among all other properties.
(3) HMOs could be reclassified as business properties, not domestic.
This reflects the reality that HMOs are businesses, with a high
turnover of occupants (like hotels); and it makes landlords responsible
for paying Business Rates.
The National HMO Lobby has adopted the final strategy as its third
objective. The Campaign for a Sustainable Canterbury launched an
e-petition
to this effect, on the 10 Downing Street website, in the summer
of 2007. The petition read as follows: "We the undersigned
petition the Prime Minister to Make Landlords of HMOs pay Council
Tax or Business Rates. CaSC - Campaign for the Sustainability
of Canterbury Communities advocates a change in the law to make
landlords of HMOs pay Council Tax or Business Rates. HMOs (Houses
of Multiple Occupation) occupied by full time students do not have
to pay council tax yet the tenants make more demands on local services
than when it was a family home - the average household is 2.3 persons
but the average HMO is at least twice that! In University towns
student HMOs create a loss of tax revenue. It is unacceptable that
landlords making very large profits should not pay for services
which their tenants enjoy as much as any other citizen! We could
have more community resources if this deficit was put back into
the public purse! The National HMO Lobby advocates amendment of
Section 66 of the Local Government Finance Act (1988) such that
HMOs no longer qualify as domestic property and thereby become subject
to Business Rate-Landlords can't have it both ways!"
On 29 August 2007, the government responded as follows: "All
property is assessed for taxation on the basis of its primary usage.
Where it is used as a person's permanent residential accommodation
it is classed as domestic and subject to the council tax. All other
property, apart from certain exempt classes like agricultural premises,
is treated as non-domestic and is subject to business rates.
Houses of multiple occupation (HMOs) are treated as domestic property
and are subject to council tax. However, it is the owners of HMOs,
not the residents, who are liable for council tax. The Government
has no plans to make owners of HMOs liable for business rates. To
do so would mean treating them differently from other domestic property.
Properties occupied solely by students, regardless of whether it
is a HMO or not, are exempt from council tax. This exemption is
designed to benefit students, not landlords, because, in general,
students are not normally entitled to income related benefits such
as housing and council tax benefit.
The distribution of formula grant to local authorities in England
takes account of the circumstances of each authority's area and
its relative ability to pay council tax, expressed in terms of the
council tax base. The calculation of a council's tax base does take
account of exempt student properties. Other things being equal,
the smaller the council tax base of a council's area, the larger
its formula grant. This effect is modified, however, by the application
of grant "floors"; that is, a guaranteed minimum percentage
increase in grant each year on a like-for-like basis."
The difficulty with this response is that the reality is that very
few HMOs are occupied as 'a person's permanent residential accommodation.'
The great majority are explicitly occupied on a temporary basis
(like student houses).
In October 2011, at a meeting of the Local Government Association
with the Secretary of State, Eric Pickles, the Leader of Portsmouth
City Council, Cllr Gerald Vernon-Jackson, voiced support for student
landlords paying business rates. The proposal was reported
in the Portsmouth News on 7 March 2012. In support of Cllr Vernon-Jackson,
on 9 March, the National HMO Lobby and many of its members, wrote
to Mr Pickles, advocating business rates for HMOs (see below). The
reply from CLG on 30 March follows, below (this includes a helpful
summary of formula grant, which partly compensates local authroities
for revenue lost through Council Tax exemptions).
Business Rates for HMOs
From: National HMO Lobby
To: Eric Pickles MP, Secretary of State
Date: 9 March 2012
Dear Mr Pickles, I write to you regarding the proposal that student
landlords should pay business rates. I understand that such a proposal
was made to you last October, by Cllr Gerald Vernon-Jackson, Leader
of Portsmouth City Council, at a meeting with the Local Government
Association (it was reported this week in the Portsmouth News, 7
March). I write on behalf of the National HMO Lobby, which is a
national association of local community associations concerned about
the impact on their communities of concentrations of HMOs.
We know that landlord associations would of course oppose such
a move. But we wanted to let you know that it would be very welcome
to the Lobby, to its member organisations (currently 45 in some
thirty towns, throughout the UK) and all their individual members.
In order to promote community cohesion, we have campaigned for
HMO Licensing and for planning controls on HMOs, where we are pleased
to have been successful. But we still find it invidious that student
HMOs impose major costs on local authorities, but these properties
contribute nothing to those authorities. We have no wish to recommend
removal of student exemption from the Council Tax that all other
residents pay. But we do consider that student HMOs should make
a contribution - and that this should be done via a business rate.
There are two reasons.
First of all, HMOs are very different propositions from domestic
properties owned or rented by single households. HMOs are very clearly
very rewarding businesses which (quite legitimately) provide for
the need for temporary accommodation by single individuals. In this
respect they are quite different from family homes, and much closer
to hostels or guest-houses. This distinction has been recognised
by the common definition of 'HMO' in both housing and planning legislation,
and by the separation in the latter of HMOs from dwellinghouses.
It seems only just therefore that the accommodation business of
HMOs should be taxed in the same way as other accommodation businesses.
Secondly, as we have noted, HMOs impose high costs on local authorities,
much higher than family homes, especially in terms of their detriment
to local amenity. This includes, for instance, a high degree of
antisocial behaviour (especially noise nuisance within the property,
in its grounds, or in local streets) and endemic waste problems
(waste disposal itself, rubbish within the curtilage, litter in
the streets) and so on. All this imposes costs on the local council,
which in the case of student HMOs are not met from Council Tax.
(We recognise that towns are compensated - but this compensation
comes from the taxes paid by Council Tax payers!)
The legal separation of HMOs from other types of accommodation
provides an opportunity for this problem to be tackled. The National
HMO Lobby urges you as Secretary of State to consider taking action
as recommended by the Leader of Portsmouth City Council.
Best wishes, Dr Richard Tyler, Co-ordinator, National HMO Lobby
HMO - PORTSMOUTH (BUSINESS RATES)
From: PSHC@communities.gsi.gov.uk
To: National HMO Lobby
Date: 30 March 2012
Dear Richard, Thank you for your email dated 9 March to the Rt
Hon Eric Pickles MP regarding privately rented Houses in Multiple
Occupation (HMOs) and business rates. Ministers are unable to respond
personally to all the correspondence they receive and your letter
has been passed to me for reply.
As you are aware, local authorities now have greater flexibility
to tackle the problems associated with HMOs in their area. Whilst
Ministers have removed the requirement for planning permission for
material changes of use from family houses to small HMOs, local
authorities can still use their Article 4 Direction powers to require
planning applications for such changes. Local authorities are also
under a duty to licence certain high risk HMOs and also have the
discretion to extend licensing to other types of privately rented
properties without having to first seek approval from this department.
Ministers believe it is right for these local decisions to be made
by those who are directly accountable to local communities. (1)
Council tax is one of the ways occupiers of domestic properties
contribute towards the cost of local council services provided in
their area. The reason that student accommodations are exempt from
council tax is because, unlike other groups of people on low incomes,
students are not normally entitled to income related benefits, such
as housing and council tax benefit. If we were to make landlords
of such properties liable for council tax, they would simply pass
the costs onto the students through raising the rent. The Government
has no plans to change the way properties occupied by students are
treated for council tax purposes. (2)
Ministers do however recognise the need to compensate authorities
for the loss of council tax income, which would otherwise have to
be raised from other local residents. This is currently done through
a formula grant, which local authorities are free to spend on any
service they consider appropriate. The distribution of formula grant
is based on authorities' economic and social factors, demographic
characteristics, and capacity to raise council tax as measured by
the number of band-D equivalent properties in each area (i.e. their
tax bases). Student exemptions are reflected by reductions in each
tax base.
In general terms, authorities with a high need to spend, and a
low ability to raise resources, will receive more formula grant
than those authorities with a low need to spend, and a high ability
to raise resources. More specifically, a relatively high student
population will tend to increase the amount of formula grant an
authority gets. (3)
Ministers are satisfied that the current HMO legislation strikes
a fair balance between the rights and obligations of landlords,
tenants and local residents. Whilst they would expect local authorities
to take a common sense approach to dealing with HMOs, it is ultimately
for them to determine the appropriate course of action in their
local area and to allocate resources accordingly.
I hope you find this information helpful. Yours sincerely, Tom,
Private Sector Housing, Department for Communities and Local Government
Notes
(1) Local authorities' powers over HMOs of course owe a lot
to the campaigns of the National HMO Lobby. But HMOs still impose
disproportionate burdens on local councils.
(2) The Lobby has no wish to make students liable to Council Tax;
it appreciates the reasons why they are not. However, the Lobby
does not consider that it's the case that landlords 'would simply
pass the costs onto the students through raising the rent.' What
actually happens is that landlords charge what rents they find the
market will bear - and enjoy the most profit they can. So business
rate would be deducted from profits, rather than added to rents.
(3) Of course, the formula grant comes from general taxation, which
is paid by Council Tax payers - so the Lobby does feel as though
residents pay twice over for the impact of HMOs on their communities!
National HMO Lobby
email: hmolobby@hotmail.com
website: www.hmolobby.org.uk
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