A recent case heard by The First Tier Tribunal addressed whether the supply of the use of a room within a premises was defined as a standard-rated supply of facilities and services or a VAT exempt supply of a license to occupy land.
The Appellant in this instance, Errol Willy (EWS) operated a salon and in addition rented out two rooms within their premises to separate beauticians who operated their own businesses from these spaces. Errol Willy did not provide any equipment or cleaning services in providing these rooms – this remained the responsibility of the tenant. Each beautician was also responsible for decorating their respective rooms and for setting their own opening hours/prices, with these businesses being operated wholly independently from EWS.
However, HMRC argued that income received in letting these rooms was liable to the standard rate of VAT as it constituted a supply of facilities and services. This was on the basis that tenants sometimes made use of EWS’ receptionist services, in addition to having access to a staff restroom and a shower room accessed via a common reception area, although this was rarely utilised.
Due to this, HMRC raised an assessment of approximately £19,000 relating to income received in relation to one of the tenants – the other had since ceased to trade. For these purposes rental income was calculated as 40% of the tenants’ takings. This was appealed by EWS and in hearing this case, the FTT considered whether the provision of these services added value to an extent that the supply could no longer be characterised as that of a land or whether they were ancillary to an exempt supply. In doing so they identified 4 criteria relating to the supply of immoveable property, namely;
- it must relate to a defined area;
- it must confer a right to occupy that property, to the exclusion of all others;
- for an agreed period; and
- for payment.
HMRC argued that several of the criteria were not met, however the FTT ruled in favour of the Appellant in this instance allowing the supply to be treated as an exempt supply of a license to occupy land, with any additional services provided deemed to be inessential to the operation of the beautician’s business.
If you or your client provide supplies consisting of multiple elements, it is important to clarify whether that being provided is defined as a single supply with ancillary elements (attracting a single VAT liability) or a multiple supply, which may affect how the supply is treated for VAT purposes as a whole. Furthermore, any business letting out excess rooms within their premises should consider this case to determine the appropriate VAT treatment of income received in doing so. For further advice on any of the issues raised in this case, please call our VAT helpline for a free initial consultation.
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