VAT Update – July 2024

A supply of accommodation in hotels, inns, boarding houses or similar establishments is subject to VAT at the standard rate. Where occupation by an individual exceeds 28 consecutive nights, there is a reduced value rule that applies and from the 29th night of the stay, VAT is only charged on the value of the supply that relates to the non-accommodation element (minimum of 20%). It is important to note that the rule does not apply to stays in holiday accommodation (holiday cottages and Airbnb-style stays for example).

In the case of BLS1 Ltd 2DS 2023/23 (an Isle of Man court case), BLS1 IoM HC the appellant provides serviced accommodation in studio apartments in London. The building consists of 81 furnished studios, each including a living area, kitchenette, smart TV, and room safe. BLS1 offers services such as weekly cleaning, housekeeping, maintenance, 24-hour reception, fast Wi-Fi, a communal lounge area, bicycle shelter, and post collection. BLS1 also engages with the local council to handle occupiers’ council tax liability where applicable. While some shorter stays were allowed, occupiers typically stayed for at least three months, with many staying for over six months.

BLS1 considered itself to be supplying accommodation in an establishment similar to a hotel and applied the reduced value to its supplies. The Isle of Man tax authority disagreed and took the view that reduced value rule did not apply to BLS1’s supplies and that BLS1 should have accounted for VAT at the standard rate on the full value of the supplies, regardless of the length of the guests’ occupancy. BLS1’s originally appealed unsuccessfully to Tribunal, with the Tribunal determining that while BLS1 provided accommodation in an establishment similar to a hotel, the reduced value did not apply on the basis that BLS1’s supplies did not amount to licences to occupy. The Tribunal decision in this case was quoted in the case of Realreed Ltd [2023] UKFTT 1042 (TC), which we recovered in our January 2024 VAT Update, BLS1 subsequently appealed to the Isle of Man High Court.

The Isle of Man High Court has now allowed BLS1’s appeal and held that the reduced value rule applies to BLS1’s supplies. The High Court determined that the Tribunal erred in law when they held that the reduced value rule only applies where the supply of accommodation would otherwise be an exempt licence to occupy land. As such, it was irrelevant whether BLS1 was granting a licence to occupy. The determining point is whether the accommodation is an establishment similar to a hotel that is used by, or held out as being, suitable for use by visitors or travellers.

Comments

Under the reduced value rule, where the non-accommodation element does not exceed 20% of the charge, the effective VAT rate for long stays after the 29th day works out to be 4%. While this significantly reduces the VAT amount due on accommodation supplies, it does not impact the serviced accommodation operator’s input VAT recovery position as the supply is still taxable and gives input tax entitlement. Given the clear benefits, businesses providing serviced accommodation to long stay guests are encouraged to review the VAT treatment of their supplies to determine whether there is scope for the reduced value rule to apply. Specifically, operators should review the nature of their supplies to determine whether they are providing accommodation in a similar establishment to a hotel, or a holiday home. The difference may appear subtle but the distinction between the two is important.

Another interesting point to note about this case is that while the serviced accommodation is located in London, the company is incorporated in the Isle of Man and the case was heard at the Isle of Man Courts. For VAT purposes, the Isle of Man forms a single territory with the UK and VAT is charged on supplies between the UK and Isle of Man as if they were domestic supplies. While the Isle of Man has its own VAT law, it mirrors UK VAT legislation and HMRC guidance is applied by the authorities in the Isle of Man.

Please contact Nick Hart or John Butterfield, VAT Directors, for assistance with the VAT treatment of supplies of accommodation.

The case of Spectrum Community Heath CIC v HMRC [2024] UKUT 162 (TCC) addresses the intricacies of both single or multiple supplies, and the extent to which the VAT exemption for medical care applies.

Spectrum holds a contract with NHS England (NHSE) for the provision of healthcare services in English prisons. While agreed that medical care provided to prisoners is exempt from VAT, Spectrum argued that their supplies of prescription drugs and contraceptives did not fall under the exemption, and the turnover generated from these supplies exceeded the mandatory VAT registration threshold, enabling it to register for VAT and reclaim VAT on costs associated to these taxable supplies. The case was originally put forth to the First Tier Tribunal (FTT), which held that Spectrum made a single composite supply of “primary healthcare or health and social care”, of which the supplies of drugs and contraceptives were components. Thus, Spectrum’s supplies would fall within the exemption.

In arguing their position to the FTT, Spectrum relied on specific case law, and adopted several justifications to support its position.

The FTT found that the supplies from Spectrum were to NHSE as the recipient and relevant consumer, rather than the prisoners. They also found that, as agreed by both parties, a single composite supply by Spectrum would be an exempt supply of medical care.

Spectrum appealed to the Upper Tribunal citing a number of technical reasons where it felt the FTT had erred in its conclusions.

It is noteworthy that the Upper Tribunal agreed with HMRC’s position that previous case law does not suggest it is impossible for elements of a single supply (which would not be viewed as exempt if viewed as a separate supply) to be exempt when they form part of a single complex supply. The Upper Tribunal also agreed that recipient of the supplies was NHSE and not the prisoners.

The Upper Tribunal did also not agree with Spectrum’s arguments suggesting that multiple supplies had been made. As the FTT’s decision to consider the supply from NHSE’s perspective was held to be correct, many of Spectrum’s arguments (provision of services by different specialists, in different locations, at different times) no longer applied. Spectrum’s argument that it was making separate supplies fell down and the appeal was lost.

Comments

Spectrum is a complex case which turned on the facts. Single and multiple supply issues often arise and one of the determining factors is the perception of the party receiving the supply. In the Spectrum case, the final analysis that the NHSE was the recipient and not the prisoners was a critical point in the Upper Tribunal’s conclusion there was a single composite supply of exempt medical services being provided.

Any situation where supplies comprise elements which, if supplied alone, would attract a different VAT treatment, requires careful examination and expert advice is recommended.

Please get in touch with Nick Hart VAT Director, if you would like to know more about the VAT complexities of single/multiple supplies.

In the case of SilverDoor Ltd [2024] UKUT 147 (TCC) the Appellant acted as agent to Property Partners, providers of short-term rentals of hotels, serviced apartments and similar properties. SilverDoor advertised the accommodation and booked the reservations (typically for short-term stays), and it charged a commission to Property Partners.

If the booking party chose to pay via a corporate credit card, SilverDoor charged an additional fee of 2.95% of the accommodation charge, to compensate SilverDoor for the cost charged to it by a merchant acquirer.

HMRC raised a VAT assessment on the appellant, concluding that the fee was consideration for standard rated reservation services. Whilst SilverDoor contended it was consideration for providing the booking party with a facility to pay by corporate card, and that this was a separate and distinct supply from the supply of accommodation, which is made by the Property Partners. SilverDoor treated the fee as VAT exempt under the financial intermediary services VAT exemption. HMRC disagreed with this treatment and on appeal the FTT concurred.

The Upper Tribunal concluded, in line with settled case law, the card payment services in exchange for the fee, was bound up in the wider reservation services provided by SilverDoor and had no separate validity. It also confirmed that to be eligible for exemption, SilverDoor needed to demonstrate that it provided a financial intermediary service, by mediating between the parties with respect to a contract for the provision of financial services. In practice SilverDoor was found to be merely providing a link for the booking party to use to pay for accommodation.

Comments

The case deals with the complexities of identifying the true character of a supply and its classification along with understanding the scope of exemption for financial intermediaries. It reinforces the principles as set out in CJEU decisions in the cases of Bookit, NEC and Everything Everywhere. It is also interesting to note that a service for which there is charge (card payment services) could be ancillary to a service (reservation service) for which consideration is only payable when payment is made in a certain fashion. This case should be of interest to parties acting in an agent capacity, and charging fees with respect to payments made by the customer in a certain manner.

Please contact Nick Hart VAT Director for advice on the scope of the financial intermediary service VAT exemption.

A recent European Court of Justice (CJEU), case serves as a useful reminder when the provision of goods for no consideration can trigger a VAT liability.

The case of Y KG (C-207/23) concerned the provision of free-of-charge heat created through use of biogas generated by a biomass installation, to two companies who used it for taxable business purposes. A supply of heat is classified as a supply of goods for VAT purposes.

Under UK VAT law the general provision exists that is where goods forming part of the assets of a business are transferred or disposed of for no consideration (payment either in monetary or non-monetary form) there is a supply for VAT purposes and VAT is due. There are generally referred to as the business gift rules and the supply which takes place is referred to as a ‘deemed supply’.

Where the provision of goods does not exceed a certain value or the goods are given away as samples, no VAT is due under these rules. It also the case there is no deemed supply in the event that the supplier has not been entitled to reclaim any amount of VAT on costs incurred with acquiring or importing the asset, or anything that has been added to it.

In the case of Y KG the CJEU concluded that the deemed supplies rules apply, even where the recipient of the free supply of goods is a fully taxable person able to fully reclaim the VAT it incurs on its costs. The same position is applied in the UK.

Comments

Transferring or disposing of assets for no consideration (free of charge) can create significant VAT issues particularly where the asset is land or property. The VAT liability of a deemed supply follows that which would apply were there to a supply for consideration. In the case of land and commercial property, this means the ‘gift’ would be subject to VAT if the transferor has opted to tax. VAT would be due typically on market value. Whilst VAT is not being charged to the recipient where this is a deemed supply (but the transferor is liable to account for VAT as described), the recipient has the opportunity to reclaim the VAT as input tax, subject to what it would be using the asset for. Where the recipient is not able to reclaim the VAT in full, a VAT cost arises, and seeking advice is highly recommended.

For the transferor, if the land/commercial property asset has not been opted to tax, and therefore the deemed supply would be exempt from VAT, that in itself may create VAT recovery issues if the asset is a capital goods scheme asset in the hands of the transferor. Transfer of a going concern (TOGC) VAT treatment can also apply to the deemed supply of assets, subject to a host of conditions being met.

In summary, the deemed supply rules that apply to the transfer or disposal of assets for no consideration, can create significant VAT implications, and if you are contemplating anything in this respect, it is strongly recommended you seek advice from our VAT specialists.

Closer to the subject matter of Y KG, we advise clients, particularly estates, on the free provision of energy across the estate, generated by solar panels, wind turbines, hear pumps and biomass installations, and VAT complexities that can create. If you are planning such an installation to provide heat and power across an estate as a whole, please get in touch.

For further information please contact Nick Hart VAT Director.