When is a supply of land not (just) a supply of land? That is the question which was answered by the High Court in this appeal from a First-Tier Tribunal (FTT) decision which found in favour of HMRC.
The FTT has ruled that short term supplies of apartments with ancillary services by a separate entity fall outside the exemption for land supplies as they constitute a supply of sleeping accommodation in a similar establishment to a hotel.
How the business operated
Realreed owns a property known as Chelsea Cloisters which contains 650 or so self-contained apartments. More than 400 of these are let on long leases but 235 are used to provide serviced accommodation. The apartments are owned by Realreed with ancillary services – including maid service, linen changes, residents’ bar and concierge - provided by a connected entity, Chelsea Cloisters Services Limited (CCSL)
The disputed apartments were let on a slightly longer-term basis than is typical for hotels, with average stays of between one and three weeks. Other factors that differentiated the accommodation from a hotel included -
- No breakfast facilities were available to occupants, only a kettle in the rooms
- Provisions such as toilet roll had to be replenished by the occupier
- There was no "room service', and
- Each apartment had a separate postal address.
Historically, Realreed had accounted for VAT on the ancillary services but not on the occupation of the short stay apartments, treating them as exempt supplies.
There was no agreement between the two companies. In practice, CCSL provided occupiers with two invoices: one for CCSL’s services including VAT at the standard rate, and a second invoice for room rental issued by CCSL as agent for Realreed, which did not include VAT. At the end of each month, CCSL accounted for the total value of the room rental by way of an inter-company accounting adjustment to Realreed but no invoice was raised and no VAT charged by CCSL to Realreed.
The VAT Act 1994 exempts from VAT a supply of goods or services within a description specified within the land exemption under Item 1 of Group 1 to Schedule 9 of the Act, namely, the grant of any interest in or right over land or of any licence to occupy land. However Item 1(d) excepts from the VAT land exemption –
“the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodationor of accommodation in rooms which are provided in conjunction with sleeping accommodation…”.
"Similar establishment" includes premises providing furnished sleeping accommodation, with or without the provision of board or facilities for the preparation of food, which are used by or suitable for use by visitors or travellers.
HMRC argued that Realreed should have been charging VAT and the FTT was therefore asked to decide if Chelsea Cloisters was “similar” to a hotel.
Nature of the services
Realreed argued that the ancillary services provided by CCSL – which bore similarities to those found in a hotel – should not be taken into account in ascertaining the nature of its supply of property. However, the FTT said that, although the services were provided by a third party, they had to be taken into account when considering whether Chelsea Cloisters was similar to a hotel.
The principle embodied in EU law that prevents supplies by different suppliers from being treated as a single supply for VAT purposes does not prevent related services by a separate entity being taken into account when determining the nature of the establishment. Realreed had a contractual obligation to supply serviced apartments which made Chelsea Cloisters an establishment in potential competition with the hotel sector.
Applying principles from an earlier EU case the FTT stated that –
- The exception in Item 1(d) should be broadly construed to ensure that the provision of accommodation in competition with the hotel sector was subject to VAT, and
- The provision of meals and drinks, the cleaning of rooms and changing of bed linen are among the characteristic features of hotels.
The FTT decided that despite the physical appearance of the property and the lack of signage, the establishment was in potential competition with the hotel sector and the provision of additional services by a separate company did not change that fact.
Realreed appealed the decision in the High Court and lost, landing Reelreed with a £4.8m backdated VAT bill.
Interestingly they also made a claim for judicial review based on the fact that HMRC had failed to pick up the failure to charge VAT on numerous tax inspections since Realreed’s ownership began in 1989.
The Court held that Realreed could not rely on this failure to support a claim for “legitimate expectation” that the supply should be exempt, flying in the face of the VAT legislation. The Courts would not shift the burden from the taxpayer to HMRC just because HMRC had failed to challenge the taxpayer’s treatment of a particular supply.
There is grey area between what might be described as the hotel sector and the residential property sector. Different premises may bear more similarities with either the hotel sector or the residential property sector depending on the particular facts. Suppliers of serviced accommodation should therefore look carefully at how they treat their supplies.
The information on this site about legal matters is provided as a general guide only. Although we try to ensure that all of the information on this site is accurate and up to date, this cannot be guaranteed. The information on this site should not be relied upon or construed as constituting legal advice and Howes Percival LLP disclaims liability in relation to its use. You should seek appropriate legal advice before taking or refraining from taking any action.