Is your room rental subject to VAT?
There are many areas of commerce that have been skirmishing grounds for VAT over the years. One perennial battleground has been the dispute about whether letting a space or room is a VAT exempt supply of a licence to occupy that space, or, because of other services provided to the occupant at the same time, is the supply of ‘facilities’ and standard rated for VAT.
Shots were fired recently in the First Tier Tribunal case of Errol Willy Salons Ltd (2022) TC 08370. The company operated a hairdressing salon and had let two rooms on the first floor of the salon building to beauticians who equipped their rooms themselves, set their own pricing and opening hours and, even though they had access to use of the salon’s receptionist services, rarely used them. Their rent was calculated as a percentage of their takings.
HMRC took the view that the services provided by Errol Willy Salons to the beauticians amounted to the provision of facilities where the room occupation was only a minor part of the supply, so the ‘rent’ was for a standard rated supply or services. Also, that the ‘economic and social reality’ was that the beauticians were provided with a standard rated licence to trade from the premises.
The Tribunal disagreed with HMRC, however, and found that the additional services provided to the beauticians were limited and not essential to their businesses, so the arrangements amounted to a VAT exempt, passive supply of property (the rooms) rather than a supply of taxable facilities.
First Tier Tribunal findings are not binding, but this result could be quite significant for many property owners up and down the country. This type of arrangement is quite common and, given the upheaval in the property market caused by Covid, it seems likely that the letting out of underoccupied properties will continue to increase. Property owners seeking to let space, and businesses already sharing their properties with third parties should consider whether this case impacts their VAT position – positively or negatively.
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