Background

CYL provides temporary accommodation for young homeless people, in two hostels.  At the time of the dispute, CYL was only operating one of these, as its other hostel was under construction, having been previously demolished.

With HMRC’s agreement, CYL had been treating hostel accommodation as exempt on the basis that it was ancillary to the provision of welfare services to the occupants.  In 2010 CYL ceased to provide welfare services and wrote to HMRC, who confirmed that the hostel accommodation would then be standard rated. This was on the basis that it was within the exemption for supplies of land, but also fell into the exclusion (Item 1 (d)) which applies to accommodation provided in establishments which are similar to hotels, inns, and boarding houses.

That meant that CYL could apply the so called ‘28-day rule’, which allows for a reduced VATable value to be applied to hotel stays exceeding 28 days. This results in an effective VAT rate of 4% whilst still allowing for full deduction of VAT on costs.

The position remained unchallenged until 2017, when a visiting HMRC officer advised that the supply of accommodation should be exempt under the welfare services provision. This triggered a chain of correspondence between the parties during which HMRC first agreed to withdraw its exempt ruling and reinstated the 2010 ruling; but then, following a policy review, decided in March 2019 that under the terms of the agreement with its tenants, CYL was not granting a ‘licence to occupy’ land. This HMRC argued, meant that CYL’s hostel accommodation could not fall within the land exemption, and thus it could not be treated as standard rated under the exclusion for hotels and similar establishments. HMRC therefore argued CYL was making taxable supplies and the 28-day rule could not apply. If HMRC was right, CYL would also not be entitled to apply the temporary 5% reduced rate for accommodation introduced to support businesses during Covid.

In reaching its decision, HMRC argued that a licence to occupy land required the tenant to have “exclusive possession” and relied heavily on the terms of the tenancy agreement and in particular clause 7 which states:

This agreement is not intended to confer exclusive possession on the Licensee nor to create the relationship of landlord and tenant between the parties. The Licensee shall not be entitled to a tenancy, or to an assured shorthold or assured tenancy, or to any statutory protection under the Housing Act 1988 or to any other statutory security of tenure now or upon the determination of the Licence.

HMRC also pointed to clauses that allowed CYL to access tenants’ bedrooms in specific circumstances and the right of CYL to change tenants’ rooms. HMRC raised an assessment for VAT underdeclared and CYL appealed.

The issues

There were two issues for the Tribunal to determine:

• firstly, whether the tenants gained ‘exclusive possession of the property’ so that the supply was an exempt licence to occupy land within VATA 1994 Schedule 9 Group 1 item 1; and
• if there was a licence to occupy, was the hostel a similar establishment to a hotel so that the exclusion to exemption applied and CYL could use the 28-day rule to reduce the output tax due.

It was accepted by both parties that CYL was not supplying welfare services; any such services were provided by third parties.

FTT decision

The FTT found that contractually there was a ‘licence to occupy’.  CYL only had access to the tenants’ bedrooms in specific limited circumstances; tenants made their own meals, were responsible for keeping rooms tidy and had exclusive possession of their own lockable bedrooms – no one else could use these rooms. Clause 7 was there merely to prevent tenants obtaining a legal tenancy under UK land law, as the aim of CYL was to provide temporary accommodation only.

On the second point HMRC’s position was that the hostel accommodation was not a ‘similar establishment’ to a hotel, as homeless tenants were selected by CYL and it did not market and sell rooms as hotels do. This would have resulted in CYL being unable to deduct VAT on its costs as the supply would be exempt. The FTT determined the important question was the purpose and function of the hostel, and the critical factor was the temporary nature of the accommodation. HMRC had focused their arguments too much on the selection process, the lack of marketing and the assessed needs of the tenants. The FTT found in favour of CYL.

What this means

The case serves as a timely reminder of the importance of identifying the nature of a supply, and that past rulings by HMRC are not ‘set in stone’.

It is not yet clear whether HMRC will appeal on either point, so institutions providing similar accommodation for temporary but long stay residents need to watch this case. We are aware of many varying and seemingly contradictory rulings from HMRC in this sector. HMRC’s policy here would appear to result in either;

• full taxation of accommodation provided for homeless people, which is largely paid for from the public purse, whereas long stays in hotels by business users or other occupants would benefit from a 4% rate; or
• exemption for temporary homeless accommodation provided by bodies such as CYL (with the consequence that CYL could not deduct VAT on its costs), but low taxation and full deduction of VAT on costs for temporary homeless accommodation provided by the commercial hotel sector, which is often used by local authorities (with no loss of input tax).

The case also brings into focus the purpose of the item 1(d) exclusion, since recent case law suggests that hotel and similar accommodation is not within the land exemption anyway. As such it is arguable that the legislation for the temporary reduced rate is wrongly drafted as it applies only to accommodation falling within item 1(d).

Organisations providing hostel accommodation will need to review their own specific circumstances as some may also provide welfare services.