Residential Accommodation to support Homelessness – VAT complexities

A range of our client sectors have been touched by the issue of providing residential accommodation over the course of the pandemic to Councils or directly to support the Homeless. Not just Universities with “spare” student blocks but also Housing Associations and commercial operators of residential accommodation which may or may not have edged across into debates about being an “hotel” or similar in their nature. Thus the recent case of City YMCA London is not just a case that those in the Charity sector – involved in the provision of homeless or hostel accommodation - should take note of. We would flag that it’s also a case for our local authority network to consider as the purchasers or funders of this provision to ensure there is a consistency of approach taken by suppliers.

In the City YMCA London case there had been past discussions with HMRC over whether the liability of their supplies were VAT exempt as welfare services (another aspect for suppliers to reflect on) or standard rated– when the YMCA restructured how they were to provide the “care” element to service users of the accommodation the VAT treatment then fell more clearly into the standard rated treatment - so why did this VAT issue now to appear at the First Tier Tribunal? The point at issue was whether the accommodation provision fell to be treated as a “hotel or similar” in the VAT context with HMRC’s argument being that the supply should have been a VAT exempt supply of land and not a taxable supply of accommodation under a specific exclusion from exemption.

Under the VAT legislation – VATA 1994, Schedule 9 Group 1 – Land – the exemption from VAT covers the grant of any interest in or of any licence to occupy land other than specific exclusions from that exemption which, at Item 1 (d) in the Group covers :

“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 or for the purpose of a supply of catering;”

We can have a debate – and often do - about whether a client’s supply falls into this definition of being “similar” to a hotel or not, but the added point here is that whilst standard rated VAT is due on these supplies – and currently the reduced VAT rate of 12.5% as a result of government policy to assist the hospitality sector – there is another VAT reduction that exists for the provision of accommodation under item 1 (d) where the provision is to an individual for a period exceeding 4 weeks (the 28 day rule).

This allows the VAT able value of the supply to reduce to a level, not less than, 20% of the overall value. The supply remains taxable (effectively a 4% VAT rate) therefore enabling VAT recovery on associated costs for the provider but the actual VAT amount charged drops.

All this brings us back to the issue raised on this “ripple”. That this is not just a case which should be of interest to any charity provider but all types of providers, or their advisers, as to the VAT treatment of their own supplies.

Council Funding Implications:

It’s also needs thought by those within local authorities as to any implications of this case as it brings into focus the need to be clear in contracts what they are actually sourcing from providers – accommodation with welfare services, exempt interest in land or taxable supplies of hotel accommodation or similar and if so does the 28 day rule apply as well in this regard.

Why a broader issue for Councils do we think? The answer to that can be found in the VAT implication for many councils of deciding to take the option of applying the VAT Exemption on their leisure services activities as a result of the Chelmsford City Council case.

Taking advantage of the leisure VAT Exemption enabled councils across the UK to access retrospective VAT repayments as a result of the VAT they had overpaid on that leisure income, but it tied them to continuing with that VAT Exemption treatment on a future basis.

For some councils this has brought them very close to breaches in their 5% de minimis level for Input Tax they incur in relation to their exempt business activity areas, of which leisure is now one. The provision of a new leisure facility can easily bring levels of VAT on costs close to a potential breach therefore the VAT treatment of services brought in to provide support to homeless people is important to understand as costs in this area are rising significantly we understand for the council sector. If suppliers make errors in their own VAT liability this ripples through the purchase ledger and the consideration and the levels of VAT paid by the council.

A risk factor to be considered in our view at least and certainly a topical issue which should prompt thoughts across the relevant sectors as to how VAT is charged and indeed incurred on accommodation in this regard.

Another of the VAT complexities that Centurion will happy to discuss should your organisation or those of your clients be affected – call your usual Centurion VAT contact or use emailus@centurionvat.com to get in touch.

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