Leasing residential accommodation such as a flat is exempt from VAT. Renting a hotel room is subject to VAT at 20%. For facilities such as ‘apart-hotels’ which seek to bridge the gap between these, it can be difficult to ascertain where to draw the line.
Fortyseven Park Street Limited, a company in the Marriot group, offered customers fractional ownership of a one or two bed private residence in Mayfair, with living areas. Customers were entitled to stay 21 nights a year, and could sell or trade these, and buy additional nights. In between times, they could store personal items in the building, which would be reinstated by staff before their arrival. The marketing suggested it was a place that felt like coming home, but with the amenities and services of a five-star boutique hotel.
The Court of Appeal held that the supply made by Fortyseven Park Street was a licence to occupy land, but it was not exempt from VAT. The court followed earlier EU judgements which explained that the reason that property letting is normally exempt from Value Added Tax is that it is normally a relatively passive activity to which the landlord does not add significant value. In this case, the additional services provided to give the feel of a luxury hotel meant that it fell outside of the exemption. These hotel-like services could not be regarded as ancillary to the provision of the apartment alone as the marketing material had promised them as a core part of the arrangements.
While this finding was enough to mean the services were subject to VAT, the court also looked at the specific exception for stays in hotels and similar establishments, which are always subject to VAT. The court held that the First-tier Tribunal was entitled to reach a conclusion on the facts that this building was a ‘similar establishment’, and the Upper Tribunal had been wrong to overturn this.
This decision confirms some principles that apply not only to apart-hotel operators but to all landlords. For any property letting it is necessary to consider what other goods and services are being provided along with the physical space. If there are additional activities, are these significant enough that they cannot be seen as ancillary? How the offering is documented in legal agreements and marketing will likely be critical in any dispute with HMRC.
Long-term lets of apart-hotel rooms with only a few facilities, and renting basically furnished flats and offices can still be exempt following this decision. However, there needs to be a regular assessment of the fact and degree of any add-ons. The direction of travel from this decision, and other recent case-law, is that the situations when exemption can be applied are being narrowed. HMRC are known to be making, and winning, challenges across a variety of situations where the physical space was only part of the picture.
To discuss how this case might impact your own property letting activities please speak to any of our VAT team.