Tax liability that lurks in the cottage

THOUSANDS of people who let their holiday homes are unaware that they should be paying National Insurance contributions as self-employed earners.

And if the DSS catches up with them, it may be too late to claim an exemption to which many would be entitled.

As far as the tax inspector is concerned, most people who have income from furnished holiday lettings must pay tax under Schedule D Case VI. This lets them off the hook of self-employed Class 4 NICs.

Few owners of holiday homes will, therefore, have considered the possibility that they might be liable for Class 2 NIC contributions, currently pounds 5.55 a week as a self-employed earner.

But the DSS policy is that a person who has furnished holiday lettings is liable for self-employment contributions unless their share of the net profit is under pounds 3,140 for this current year (pounds 3,030 last year).

It is not necessary for an activity to constitute a trade to be a self-employed earner. An activity that is a business will suffice.

Neil Booth, the head of the National Insurance department at accountants KMPG Peat Marwick, said: 'The DSS will regard furnished holiday lettings as a business unless you can show self-employment only involves a couple of hours per week. If literally all you do is spend a couple of hours collecting rents and have no other involvement, then the DSS deems the self-employment 'inconsiderable' and they do not enforce payment of a self-employed contribution.'

However, if you have furnished holiday lettings you may have a hard job convincing the DSS that all you do is take the rent money. You are likely to spend time taking bookings, keeping accounts and cleaning.

The DSS looks at the year as a whole and takes the view that liability continues in the off-season if bookings are taken and the property is maintained. In a case in 1953, a boarding house proprietor was held to be self-employed throughout each year, even though the greater part was spent in cleaning and decorating in preparation for the holiday season.

If the letting of a holiday cottage is a business that drags the landlord into the Class 2 net, are there other activities which will do the same?

Yes, said Mr Booth. 'For example fostering children, if the foster parents' pay includes a reward element. In short, any 'serious activity earnestly pursued' which either produces actual gain, or which has gain as one of its motives, is sufficient to bring the active earnest pursuer within the definition of a self-employed earner for Class 2 purposes.

'I have not yet seen the DSS try to exact Class 2 contributions from the 'Andy Capp' who spends his time studying racetrack form and trotting up and down to the betting shop - but it could happen,' he said.

There is no upper ceiling for Class 2 NICs. It is a flat-rate contribution. You either pay it or you get an exemption if you can show that your profits are below the small-earnings limit.

If you have intentionally or unintentionally been avoiding the DSS law, there could be a high price to pay.

Mr Booth said: 'If, four or five years down the line, you or the DSS discover you should have been paying Class 2 contributions, then, even though you could have applied for the exemption, it is too late. There is a 13-week limit to claim retrospectively. You will have to pay unless you can twist the arm of the DSS to waive the arrears.'

The DSS is on the look-out for those self-employed who have not registered to pay Class 2 NICs. In 1992, it had a target of 40,000 defaulters, and found them. This year's target is 100,000.