VAT – Supply of serviced flats

D owned a company which had bought some flats around 20 years ago through an agent who has been renting them out since then.  This was D’s query:

‘It all started in August 2014 when the agent came to see me as he said he had been made aware for the first time that VAT was chargeable on the rents he had been charging on behalf of my company. He had been told about VAT Notice 709/3/13 which relates to hotels and holiday accommodation. Buried in this notice is a reference to supplies of similar establishments including ‘serviced flats’ being taxable.

I am not at all clear on what ‘serviced’ means since all flats are cleaned and the linen refreshed. It seems that if this is not done personally by the owner it then becomes a ‘serviced’ flat.  Nor am I clear on what ‘other than those for permanent residential use’ means since all of my company’s flats are solely for residential use.

The agent has a well-established client base of companies who take accommodation for their staff who occupy for periods of up to three months. If this accommodation (or similar accommodation) was not available I suppose these companies would send their staff to a hotel. These lets clearly aren’t holiday accommodation. Lets to companies represent about 80% of the total letting activity. To the best of my knowledge these lets are dealt with by an email request for accommodation from the company.

There are also lets to individuals who may occupy for a few days, a week or perhaps two weeks. Some of these come through the agent’s website or they may be walk-in business. Some of these undoubtedly are holiday lets but many are to business people in London on business and to those attending the various medical centres in the immediate vicinity.

The agent provides some services to tenants – he will organise airport transport for example. but this has nothing to do with my company. We are not charged for it nor for anything else that the agent does.  Obviously if he can provide additional services this may make his business more attractive and enable him to earn commission from us, but I don’t think this represents any significant part of his business as corporate clients tend to require few if any additional services.

The only ‘service’ my company provides is what is charged by the agent as the ‘servicing’ charge.  The agent explains this as follows:

‘Included within the servicing cost is the cleaner’s time to attend to clean and provide a change of linen and towels. We include this once a week. The tenants can ask for more at their cost. The tenants pay for the cleaning at the end of the stay.’

We are not providing a hotel room. We provide apartments – bedroom, lounge, bathroom, kitchen. I believe the tenants stay because we provide facilities hotels generally do not provide (separate rooms – bed, lounge, kitchen) and they don’t have to pay for facilities hotels do provide which they don’t want to be charged for.

Is the agent right that we have to charge VAT?’

Ann’s initial advice was as set out below.

Article 135.1(l) of Directive 2006/112/EC exempts ‘the leasing or letting of immovable property’ excluding:

‘the provision of accommodation, as defined in the laws of the Member States, in the hotel sector or in sectors with a similar function, including the provision of accommodation in holiday camps or on sites developed for use as camping sites;’

The UK law which must, if possible, be construed as not making the scope of the exclusion from exemption wider than permitted by the Directive, is in Item 1(d) Group 1 Schedule 9 VATA 1994.  This provides that:

‘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’

is always subject to VAT at the standard rate.

A ‘similar establishment’ includes (but is not limited to):

‘premises in which there is provided furnished sleeping accommodation, whether with or without the provision of board or facilities for the preparation of food, which are used by or held out as being suitable for use by visitors or travellers’.

Therefore for the supply to be taxable under UK law it needs to be:

1. the provision of sleeping accommodation or of accommodation in rooms which are provided in conjunction with sleeping accommodation;
2. in a ‘similar establishment’ to an hotel, inn or boarding house.

The supply of an apartment, serviced or not, is not, in my view, the provision of furnished sleeping accommodation.  It is the provision of living accommodation.  A further argument may be that, unlike in the case of a hotel, inn or boarding house, sleeping accommodation is not provided ‘in’ the premises.  The supply here is a supply ‘of’ the whole premises.

I would need to see a copy of your contracts with the agent, with the customer and any agreement with the occupier.  I assume that you contract with the corporate customer and not their staff.  It may be that, based on those documents, we can run the argument that you are not supplying a ‘serviced flat’ (even if that is what clients receive).  In any event ‘serviced flat’ is not a term that appears in the legislation, only in VAT Notice 709/3/13.  It appears to be HMRC ‘shorthand’ for the test of whether the supplies are similar to those provided in an hotel etc.  HMRC in suggesting that the supply of a serviced flat ‘other than those for permanent residential use’ is always standard rated are, in my view, going further than the law allows.

If asked HMRC would almost certainly say that the supply is taxable based on their published view in Notice 709/3/13.  It would probably be necessary to take the case to the tax tribunal to get HMRC to change their mind. This will be time-consuming and expensive.

At the time of publication this case study was technically accurate however, as tax law and practice change rapidly, you should take specific advice before taking any action.