Supplies of serviced apartments subject to VAT

The FTT has held that short term supplies of apartments with ancillary services by separate persons fell outside the exemption for land related supplies as the provision of sleeping accommodation in a similar establishment to a hotel: Realreed Ltd v HMRC [2023] UKFTT 1042. The FTT concluded that the typical short term nature of the lettings (less than 28 days) and the provision of additional services indicated that the accommodation was provided in a similar establishment to a hotel.

In addition, the FTT has also held that the fact that HMRC did not question the VAT treatment in a number of inspections did not mean that the error on the part of the taxpayer was not careless.

Background

Realreed owned premises known as Chelsea Cloisters which contained 656 self-contained apartments. 421 were on long leases which HMRC accepted were exempt from VAT, but 235 were subject to shorter term arrangements with a number of ancillary services (such as a daily maid service, linen changing, concierge, residents bar and end of stay cleaning). VAT was accounted for on these related services. Following an inspection, HMRC took the view that these were subject to VAT at the standard rate as they fell within VATA 1994 Sch 9 Group 1 Item 1(d) which excludes from exemption “the provision in a hotel, inn, boarding house or similar establishment of sleeping accommodation”.

Realreed initially and unsuccessfully challenged HMRC’s decision to assess VAT on its supplies on the basis that HMRC’s failure, during previous inspections, to query the correct treatment gave rise to a legitimate expectation. That argument was rejected and is covered by our earlier article, HMRC inspections and legitimate expectation.

Following that failure, Realreed sought to argue on appeal that the supplies of shorter term accommodation did not fall within Item 1(d).

Accommodation similar to a hotel

The first problem confronted by the FTT was the question of who made the supplies. Whilst Realreed owned the property, both accommodation and ancillary services were invoiced by a separate entity, CCSL, a company under common ownership with Realreed. Realreed argued that, since the related services were provided by a separate entity, they could not “infect” Realreed’s supplies of accommodation for the purposes of Item 1(d) on the basis of the Telewest principle (that supplies by different suppliers cannot be part of the same single supply). Whilst the FTT considered that a realistic interpretation of the arrangements (based on inadequate evidence) was that Realreed provided the accommodation and CCSL the related services, that did not mean that CCSL’s supplies were irrelevant to the question whether the supplies were in a similar establishment to a hotel. The Telewest principle prevented supplies by different suppliers to be treated as a single supply for VAT purposes, but it did not prevent related services by a separate entity being taken into account for determining the nature of the establishment in which the accommodation was provided.

HMRC accepted that supplies of lettings for an initial period exceeding 6 months or made on assured shorthold tenancy (AST) conditions could be excluded. Realreed argued that if those supplies were exempt, then all the supplies should be exempt. The FTT noted that the question asked by the legislation was simply whether sleeping accommodation is being provided in an establishment which is similar to a hotel. Therefore, the only question the law is posing is answered by looking at the premises as a whole and not the terms on which the accommodation is offered. As such, HMRC’s agreement regarding AST lettings had been unjustified.

The FTT noted that the question of the length of a letting was more difficult. Whilst, in principle, the answer should be the same (it made no difference), there was clear authority from the CJEU (in Blasi) that German provisions that distinguished between lettings of 6 months or more and shorter periods were justified. This is on the basis that the purpose of the provision is to treat supplies made by establishments potentially in competition with hotels in the same was as hotels. As such, the FTT agreed that supplies of accommodation for an “ineluctable fixed initial term” of at least six months would potentially fall outside Item 1(d).

Next the FTT concluded that Chelsea Cloisters was an establishment similar to a hotel. Hotels generally provide shorter term accommodation and looking at the data for Chelsea Cloisters, between half and two-thirds of all stays were for less than 28 days. This data suggested it was used by persons for relatively short periods on the whole (despite the fact one person had been there for 20 years). There was also the provision of ancillary services including a daily maid service, concierge, linen change, and cleaning at the end of the stay. A bar and restaurants were available to residents (though not exclusively).

VATA 1994 Sch 6 para 9

This provision restricts the value of taxable supplies where a person is provided with accommodation within Item 1(d) for more than four weeks. In those circumstances, the value of the supply is restricted to the value of the additional facilities provided (and not the accommodation), subject to a minimum of 20% of the total consideration.

HMRC agreed that this applied, but the question was what did it reduce the value of the supply to? On the basis that the ancillary supplies of facilities were made by CCSL and the accommodation was provided by Realreed, HMRC argued that the minimum value of the taxable supply was 20% of the accommodation element (rather than 20% of the total cost). Realreed argued that this approach ran counter to the purpose of the provision (which was based on a derogation from the VAT Directive) and in applying the 20% test, either:

• The 20% minimum should not apply where the charge is entirely for accommodation, or
• the supplies of both Realreed and CCSL should be taken into account in applying the 20%.

The FTT has rejected those arguments. The first could not be accepted on the basis that it would lead to less than a minimum floor of 20% valuation where the value of the supplies by CCSL were less than 20% of the accommodation element (as was the case). The second approach could not be accepted as it would lead to a situation where the value of the supply by one person (Realreed) depended on the value of supplies by a separate person (CCSL) and that approach would be “departing from the Telewest approach of treating supplies made by separate suppliers completely separately”.

The result of splitting the supplies of accommodation and services between separate suppliers inevitably resulted in the disadvantage in this case and could easily be remedied by Realreed making both supplies to residents.

Penalties

Finally, Realreed argued that the imposition of a careless penalty in this case was inappropriate, given HMRC’s failure to raise the issue through a number of inspections. Whilst those inspections may not have given rise to a legitimate expectation, they should be taken into account in determining the level of penalty appropriate.

The FTT has rejected this argument. The question was whether Realreed had taken reasonable care in applying the VAT exemption to its supplies and in this case it had not. There was no evidence of professional advice being taken or internal analysis undertaken and although HMRC did not challenge Realreed’s approach, HMRC never indicated they agreed with the approach. In this case, even a superficial reading of the legislation would have made a reasonable, thoughtful person question the correct VAT analysis, but there was no evidence that Realreed had made any effort to question whether its approach was correct.

Comment

The decision contains a number of interesting features. In relation to the Telewest principle, the FTT has applied it to prevent a difficult application of VATA 1994 Sch 6 para 9, but equally noted that it does not prevent separate related supplies being taken into account in determining a separate question (of whether a place was similar to a hotel).

As regards the question of the provision of sleeping accommodation in premises similar to a hotel, the FTT has rejected the argument that the precise terms of each arrangement should be regarded as relevant. Whilst this may be correct, the broader requirement that the provision applies where the supplies are essentially in competition with the hotel sector should mean that the terms in general are a very relevant factor, including the length of the term.