A court of appeal case centred around VAT on property could act as a beacon of light to businesses providing accommodation that does not fall under a tenancy agreement, according to a leading law firm.
A judge has ruled in favour of BSL1 Limited in a case to determine how much VAT should be paid on its property The Quarters Swiss Cottage, in London – a judgment which could prove significant for those providing serviced accommodation, Airbnb rentals, hostels, student accommodation or any accommodation without a tenancy agreement for stays longer than 28 days.
The Quarters Swiss Cottage has 102 units and provides guests with high class en-suite accommodation with amenities including a desk, kettle, microwave, safety deposit box, flat-screen TV, toiletries and cleaning services, as well as facilities such as a 24-hour front desk, restaurant and gym.
The case was between BSL1 Limited, which was incorporated in the Isle of Man, and the Isle of Man Treasury Customs and Excise Division (IOMCE).
The debate focused on a special rule which reduces the charge from 20 per cent to, in this case, four per cent and applies to stays over 28 days in a “hotel or similar establishment”.
IOMCE challenged not only whether the accommodation provided falls into this category, but also insisted that the rule was only available if the accommodation also qualified as land where occupants enjoy rights to use it as an owner.
IOMCE argued that The Quarters Swiss Cottage did not meet these requirements and should therefore account for 20 per cent VAT, while law firm Wright Hassall, acting on behalf of BSL1, argued against this in favour of the effective rate of 4 per cent.
The case was originally heard at a VAT and Disputes Tribunal in the Isle of Man, which ruled that the accommodation did fall into the category of “hotel or similar establishment”.
However, the Tribunal went on to say that, while hotels supplied land, The Quarters Swiss Cottage did not.
This meant that the special VAT rule was available to hotels but not to a “similar establishment” such as The Quarters Swiss Cottage - a confusing distinction would make it almost impossible for suppliers of accommodation to understand whether they could or could not apply the special rule.
The Tribunal’s ruling was then overturned at the Isle of Man’s appeal court (“Staff of Government”), overseen by a senior VAT specialist judge (“deemster”), where Wright Hassall’s argument showed that the special VAT rule applied without any requirement in law that the accommodation must also be a supply of land.
Wright Hassall also argued that supplies of long-stay accommodation within The Quarters Swiss Cottage were as much a supply of land as supplies of long-stay accommodation within a hotel, but the appeal court declined to decide this point.
Kevin Hall, VAT specialist and partner at Wright Hassall, advised BSL1 throughout the case.
He said: “This case shows businesses how to defend against challenges that their accommodation is not a “hotel or similar establishment”. It also shows businesses they can resist HMRC when they apply the VAT legislation incorrectly.
“We can only hope that HMRC does not try to continue its campaign to deny the special VAT rule to accommodation-providers who are similar to hotels, but we now know HMRC’s challenges can be resisted.
“There are a significant number of businesses in this space which aren’t a traditional hotel, but also aren’t providing a home residence.
“Many of these businesses won’t be aware that they sit within an area of uncertainty when it comes to VAT, but it’s something they should be aware of as we may well see an increase in these cases brought about by HMRC and IOMCE.
“There are not huge margins in this industry, particularly in London where it is incredibly competitive, so a 16 per cent decrease in the VAT being paid could be the existential difference between continuing to be profitable and going out of business.
“It is therefore incredibly important that this ruling has been overturned, and the case will act as a beacon of light to help illuminate the issues which HMRC are currently challenging and how to meet those challenges.
“Equally it will show some who are charging the full 20 per cent VAT but offer accommodation in excess of 28 days that there are savings to be made, and potential rebates available for the past four years.
“We are extremely pleased with the result of this case. It’s a great relief to be able to support the industry as a whole and help it to continue.”
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