Constable VAT Land & Property Focus April 2022
Welcome to the first 2022 edition of the Constable VAT Land & Property Focus. This newsletter is intended for readers with an interest in the land and property sector and provides a summary of recent updates and significant judgements from the tribunals and courts which may be relevant to you or your business.
Hospitality, holiday accommodation and attractions
The temporary reduced rate which applied to hospitality, holiday accommodation and attractions, introduced as a result of COVID-19, ended on 31 March 2022. From 1 April 2022 the normal VAT rules apply for these supplies and VAT should be charged at the standard rate.
The end of reduced rating will affect areas such as entrance to attractions, pitches for holiday caravans and associated facilities, catering and takeaway food, hotels and holiday accommodation. The relevant guidance has been updated to reflect the end of the temporary application of reduced rating.
Changes to the VAT treatment of the installation of Energy Saving Materials in Great Britain
HMRC has released The Value Added Tax (Installation of Energy-Saving Materials) Order 2022. This new measure introduces a time limited zero rate of VAT for the installation of certain types of energy saving materials (ESMs) in residential accommodation. The zero rate will be available for a period of 5 years and will then revert to the 5% reduced rate of VAT.
Notifying HMRC of an option to tax land and buildings
Form VAT1614A is required to notify HMRC of an option to tax land or buildings. HMRC has recently updated this form so that it can now be filled in online and printed afterwards. Also, the form has been updated at the “Previous exempt supplies” section and requires more information (bearing in mind that previous exempt supplies create the need to either meet an “automatic approval” condition or obtain HMRC’s permission to opt to tax).
Construction self-supply charge
HMRC has published Revenue and Customs Brief 13 (2021) which explains HMRC’s revised policy on the meaning of ‘entire interest’ in the context of the VAT treatment of the construction self-supply charge. This follows the decision of the Supreme Court on 31 March 2021 in Balhousie Holdings Limited 2021 UKSC 11.
The guidance applies to:
- organisations within the care home, NHS or charities sector
- businesses engaged in property transactions carried out for a relevant residential or relevant charitable purpose.
If you are concerned that this may affect your organisation please reach out to your usual Constable VAT contact.
First Tier Tribunal
1. Car boot sale pitch
This case concerned Rufforth Park Limited (RPL). RPL appealed against a VAT assessment in the amount of £82,995. The point under appeal was whether the car boot sale pitches issued by RPL constitute to the grant of a VAT exempt interest in, right over or license to occupy land. Alternatively, was RPL’s supply a broader service and subject to the standard rate of VAT, as HMRC contended.
This has become an increasingly contentious area of VAT. Simplistically, most passive supplies of land are VAT exempt unless an option to tax has been made. The issue is “At what point do other factors or additional services provided with the land change that classification?”
HMRC argued that the rental of the pitches at the car boot sale is more than a passive supply of land. They argued the supply is a provision of services, as RPL also supplies advertising, on site café, toilets, parking, capital improvements to the site to make it more attractive to buyers and cleaning of the site after events. HMRC argued that these events were expertly organised and run by RPL, relying on case law such as Craft Carnival, such that sellers were receiving a service rather than a pitch.
In considering the position the Tribunal contrasted the Craft Carnival case. The Craft Carnival events were held at prestigious venues, electricity was available for all sellers, tables and chairs, as well as a choice of indoor or outdoor pitch was offered.
In RPL’s case, no chairs, tables, or electricity are provided. There is no provision of security. The toilet and refreshment facilities are basic. The related expenditure by RPL was maintenance rather than enhancing facilities. Therefore, the Tribunal concluded that the commercial and economic reality is that RPL supplies an exempt license to occupy a pitch. It observed that because the event was well organised and run for 40 years does not make it “expertly organised” in the terms HMRC suggested. RPL’s appeal against HMRC’s assessments was allowed.
Constable Comment: This decision provides helpful guidance albeit, as a First-tier Tribunal case, it is not binding as far as HMRC’s dealing with other taxpayers is concerned. However, it does not remove the fundamental problem that it has become almost impossible to identify a tipping point at which a supply of land becomes subject to VAT because of additional services enhancing that supply. This has become a real risk management issue, perhaps illustrated by the fact that HMRC had in the past ruled that RFL’s supplies are taxable, later withdrawing that ruling in favour of exemption (when RFL pointed out that competitors applied exemption) only to change its mind again. In that respect, it seems surprising that HMRC went on to assess VAT retroactively, having previously agreed exemption. The obvious question is “If HMRC keeps changing its mind and eventually makes the wrong decisions (based on this decision) how on earth are taxpayers expected to make the correct judgment?” There is certainly a case to simplify the law but until that occurs it is wise to seek professional support in grappling with situations like this.
2. Supply of room and services
This case concerned Errol Willy Salons Ltd (EWS), and the main issue to be determined was whether the business made an exempt supply of a license to occupy in respect of rooms used by beauticians or whether that supply should be classified a standard rated supply of facilities and services.
The premises consisted of two floors. The ground floor and front part of the first floor was occupied by EWS. The back part of the first floor had two rooms which were rented out to beauticians. The rent payable by the tenants were calculated as a percentage of their turnover.
HMRC argued it was a standard rated supply of facilities and raised an assessment in the sum of £18,649. The Tribunal considered European case law (Stichting ’Goed Wonen v Staatssecretaris van Financiën (Case C-326/99) where 4 fundamental characteristics of leasing or letting immovable property are considered. They are as follows:
- The arrangement must relate to a defined area of immovable property,
- It must confer a right to occupy that property, to the exclusion of all others,
- For an agreed period
- For payment
HMRC agreed that the defined area condition is met however stated that there was no evidence to show that the other 3 conditions have been met because it was uncertain whether there was a right to exclude others from the area, there was no evidence that the right of occupation was for an agreed period and as rent was charged on a turnover basis, the condition that payment must be given was not met.
The Tribunal disagreed with HMRC, it was evident that the rooms belonged to the beauticians and were theirs to do with as they chose, it was evident from the contracts that payment was due monthly therefore there was an agreed period of at least a month. The fact that there is a notional possibility that rent is not paid in a particular month due to no turnover did not change the fact that the lease does contain provisions for the payment of rent, therefore the Tribunal concluded that all 4 characteristics are present.
In response, HMRC attempted to argue that the services supplied by EWS were such that the arrangement should be regarded as the active exploitation of the rooms, adding significant value therefore it cannot be regarded as a supply of land. The Tribunal considered whether the additional services such as receptionist services, the availability of toilets and staffroom amounted to “significant added value”. It was concluded that these services were ancillary to the main supply of the room, the beauticians were not required to use those services, it was not essential to their business. The Tribunal concluded that the additional facilities did not change the intrinsic nature of the supply and the supply was of a license to occupy land and therefore VAT exempt, the appeal was upheld.
Constable comment: This is a helpful case in an area that has long been contentious, but no doubt further similar cases will continue to appear at Tribunal. The case illustrates the benefit of clear written agreements considering a license to occupy land where there are other services being provided to the person occupying an area of a property. HMRC are often keen to characterise such relationships as a taxable supply of facilities rather than a VAT exempt supply of license to occupy land.
3. Accommodation for homeless people
This case concerns City YMCA London (CYL), a registered charity, that appealed HMRC’s classification of the supply of services made by CYL to young people of hostel accommodation in return for payment.
As with many VAT cases, the position is not straightforward and can be complicated. In late 2010 CYL lost its ‘supporting people’ grant funding which meant that it would be supplying minimal welfare services.
To continue its support of those in need CYL makes a charge for its services, which consist primarily of accommodation and advice. Each individual resident is responsible for paying their room fee; however, this is most likely met by Housing Benefit, Universal Credit or Disability allowance.
The decision helpfully sets out the chain of events that followed after CYL lost its ‘supporting people’ funding. These can be broadly summarised as follows:
- January 2011 – CYL writes to HMRC seeking clarification of the VAT liability of its supplies moving forward now it is not receiving the ‘supporting people’ grant.
- March 2011 – HMRC confirms CYL’s supplies of accommodation and general advice was subject to VAT at the standard rate. The charity applied the 28-day rule which allows it to charge VAT at a reduced value to residents for stays over 4 weeks.
- September 2014 – HMRC carries out a routine VAT compliance visit to verify the charity’s VAT accounting records, specifically ensuring that the 28-day rules were being correctly applied.
- August 2017 – HMRC conducts a VAT compliance inspection which is followed by a letter advising that its supplies are VAT exempt supplies of welfare.
- October 2017 – HMRC revises its position and confirms that the charity’s supplies are standard rated as CYL is supplying sleeping accommodation and is “a similar establishment” to a hotel or boarding house.
- October 2018 – HMRC writes to CYL requesting more information about the services it supplies, whilst advising that HMRC did not now consider that it met the ‘hotel like’ accommodation criteria which (potentially) may not allow the charity to account for a reduced rate of VAT for stays for a continuous period of more than four weeks.
- January 2019 – HMRC writes to the charity and advises that its supplies are VAT exempt, not of welfare but of land (accommodation).
- March 2019 – HMRC writes to CYL reversing its decision of 2 months earlier and advises that the charity’s supplies are standard rated supplies of land (accommodation) and are specifically excluded from exemption. However. The charity’s supplies are not ‘hotel like’ and it cannot take advantage of the reduced rate where a guest stays for a continuous period of more than four weeks.
The benefit of the 28-day rule is that, provided certain conditions are met, including the provision of sleeping accommodation in hotels, inns, boarding houses and similar establishments is that from the 29th day of the stay VAT is only due on meals, drinks, service charges and other facilities provided apart from the right to occupy the accommodation. The value of the accommodation is excluded from any calculation to determine output VAT due.
HMRC confirmed that the new ruling would take effect from 1 March 2019, there would be no VAT assessments raised for the incorrect application of ‘the previously under declared VAT’ under the long stay rules.
CYL sought an independent review of HMRC’s final decision. The charity is advised by a letter dated 18 July 2019 that the March 2019 decision is upheld. This led to CYL’s appeal to the Tribunal.
The technical points to be considered were as follows:
- Is the charity’s supply one of a ‘licence to occupy land’ and a VAT exempt supply?
- If the charity’s supply is initially held to be a VAT exempt ‘licence to occupy land’, does the exclusion from VAT exemption as ‘the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation or of accommodation in rooms which are provided in conjunction with sleeping accommodation or for the purpose of a supply of catering’apply?
In practical terms if a) above applies, the charity does not have to account for output VAT on supplies made/income received and it may be unable to reclaim VAT incurred on directly related costs. If b) above is correct, and CYL’s supplies are excluded from exemption on the basis that it is a ‘similar establishment’ to a hotel etc then it can reclaim in full VAT incurred that directly relates to making these supplies, and account for VAT on a reduced sum received because the majority of its residents stay for over 28 days.
HMRC’s preferred analysis is that the charity’s supply is one of a range of facilities (sleeping accommodation, access to communal facilities [kitchens, lounges] and oversight and control, signposting etc. As such, the charity’s supplies are standard rated, and it does not meet the ‘similar establishment’ to a hotel test in order to allow it to apply the reduced rate for long stays.
The Tribunal found that the preponderant element of the supply is the provision of sleeping accommodation. Any other facilities or services supplied are ancillary and provided in the course of making the main supply of accommodation. The commercial and economic reality is that the supply is of a bedroom which characterises the liability of the supply.
The second point is whether CYL is a ‘similar establishment’ to a hotel, boarding house etc. The Tribunal found that the charity’s supply is a ‘similar establishment of sleeping accommodation’ because its intended purpose is providing temporary accommodation to homeless young people. In particular, the Tribunal noted that the temporary nature of the accommodation provided sets CYL supplies apart from VAT exempt long-term lettings of residential accommodation. Therefore, the charity’s supply is similar to the provision in the hotel sector.
Constable VAT comment: This is an interesting case, and it remains to be seen whether HMRC will lodge an appeal to the Upper Tribunal. A decision of the First-tier Tribunal is only binding on the parties involved and does not set a wider precedent. The decision demonstrates the benefit to CYL of clarifying the VAT liability of its supplies with HMRC in 2011. If any taxpayer submits a non-statutory clearance application to HMRC then, provided full facts are given, HMRC are bound by its decision and cannot take retrospective action. This explains why, when in 2019, HMRC gave its final decision it only applied the amended VAT liability from a current date and did not seek to raise retrospective VAT assessments to 2015. If any business desires certainty as to the correct VAT liability of its supplies, and where there are potentially different interpretations, we would recommend pro-actively liaising with HMRC.
Please note that this newsletter is intended to provide a general overview of the subject. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.