INSIGHT: Property Lettings May Be Subject to U.K. VAT

This U.K. value-added tax (VAT) development will be of interest to organizations involved with leasing property such as apartments, halls or wedding/party venues. The default VAT treatment of the letting of bare land is that it is exempt from VAT. However, the direction of travel in recent case law is that the provision of additional services with the land changes the nature of the supply so that VAT at the standard rate becomes due.

Court of Appeal Decision in the Fortyseven Park Street Case

The U.K. Court of Appeal has ruled that payments for luxury apartments offering the facilities of a five-star hotel were subject to VAT, confirming principles that apply to any property letting where additional services are provided.

Leasing residential accommodation such as an apartment is VAT-free (exempt from VAT). Renting a hotel room is subject to VAT at 20%. “Apart-hotels” often seek to provide an element of both, and this has led to uncertainty as to how they should be treated for VAT purposes.

Fortyseven Park Street Limited offered customers fractional ownership of a one- or two-bedroom private residence in London’s Mayfair, with living areas. Customers were entitled to stay a certain number of nights a year, which could be traded and additional nights purchased. Customers could also store personal items in the building, which would be reinstated into the apartment by staff before their arrival.

The company sought to offer a place that felt like coming home, but with the amenities and services of a five-star boutique hotel. The Court of Appeal, in a decision that will be binding on other taxpayers, held that the supply made by Fortyseven Park Street could not benefit from the exemption for land services and was subject to standard-rate VAT.

The court followed earlier EU judgments which explained that the reason that property letting is normally exempt from VAT 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.

An argument that the additional services were ancillary to the provision of the property (and so followed its VAT liability and could be exempt from VAT) failed, as the customer’s expectation, based on how the property was promoted, was that the additional services formed a core part of the arrangements.

While this finding was enough to mean the services were subject to VAT, the court also considered a further argument about the compulsory exception to the land exemption that applies to stays in hotels and similar establishments, which are always subject to VAT. The court held that the First-tier Tribunal, in an earlier phase of this litigation, 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.

Planning Point

This decision confirms 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? It is clear from the court’s decision that the customer’s expectations, based on documentation such as marketing material and legal agreements, will be influential in arriving at the VAT analysis.

Operators should keep in mind that long-term lets of apart-hotel rooms with only a few facilities, and renting basically furnished flats and offices, can still be exempt from VAT following this decision. However, there needs to be a regular assessment of the fact and degree of any add-ons. This also applies to providers of halls and wedding/party venues where there has also been recent case law looking at what services/facilities were being provided alongside the venue.

The direction of travel from this decision, and other recent case law, is that the situations when exemption can be applied are being narrowed. HM Revenue & Customs are known to be raising challenges across a variety of situations where the physical space was only part of what was being provided.

Robert Marchant is VAT Partner at national audit, tax, advisory and risk firm, Crowe. For more information on Crowe, please visit www.crowe.co.uk

He may be contacted at: Robert.Marchant@crowe.co.uk

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.