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VAT: You can get a reduced rate at the YMCA

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A hostel for homeless young people has successfully challenged HMRC who wanted it to charge more VAT to its residents.

8th Feb 2022
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City YMCA London (CYL) operated hostels for homeless young people. Following visits to other YMCA establishments HMRC issued a ruling that these hostels were not similar to hotels, so it could not charge reduced VAT to residents who stayed longer than 28 days. 

What is excluded from the exemption? 

A licence to occupy land for VAT purposes is exempt from VAT and falls within VATA 1994, Sch 9, Gp 1, item 1 and EU law the Principal VAT Directive (PVD), article 135 (1) (I).

Hotel accommodation is excluded from the exemption so is standard rated for VAT. However, there is a reduced value supply concession which allows VAT to be charged at 20% of the value of the supply once 4 weeks or 28 days have elapsed. 

This exclusion from the exemption covers hotels, inns, boarding houses or ‘similar establishments’. VATA 1994, Sch 9, Gp 1, item 1, note 1 defines ‘similar establishment’ as including sleeping accommodation.

HMRC view 

Since 2011 CYL had used these provisions, although over the years HMRC had challenged its interpretation. Finally in 2019 HMRC issued a ruling that CYL did not supply hotel type accommodation but rather the use of facilities which were standard-rated, negating the exclusion from the exemption.
 
CYL appealed that decision to the FTT (TC08351).

FTT case

The FTT considered two issues:
1.    Whether supplies of temporary accommodation were an exempt licence to occupy land as maintained by CYL.
2.    Could CYL apply the exclusion to the exemption in VATA 1994, Sch 9, Gp 1, item 1d? 

HMRC argued that Clause 7 of the licence agreement did not give exclusive possession as required to make it similar to hotel accommodation. Regarding the exclusion to the exemption, various factors including the fact that residents were selected by CYL through a process involving other agencies meant that it did not operate similar to a hotel.

The starting point was the contractual arrangements and whether they reflected the economic and commercial reality of the transactions. 

The FTT also considered the legal concept of letting and leasing immovable property most notably the CJEU case Temco Case C-284/03, where the Advocate General outlined five elements – transfer of immovable property, to the exclusion of all others, for use and enjoyment, for an agreed term, in exchange for payment of rent. 

Did Clause 7 of the licence agreement negate the test of exclusivity as maintained by HMRC? Or, as CYL maintained, was this in place purely for legal reasons so as to ensure residents could not claim a tenancy? 

The FTT took a “functional approach” meaning that rather than just relying on the legal classification, the economic reality of the transaction should also be considered.

The FTT concluded that CYL had supplied the use of a bedroom for the enjoyment of the resident to the exclusion of all others for a period of time and for a price despite Clause 7.  HMRC also argued that there was a supply of several components including communal facilities that would fall as standard-rated. The FTT found that 95% of the daily charge was for the bedroom and that this was the preponderant component of the supply.

Hotel or similar?

The second question concerned the exclusion under item 1(d); was the CYL hostel a similar establishment to a hotel? 
The FTT followed the CJEU Blasi Case C-346/95, regarding the term ‘similar establishment for sleeping accommodation’. The term ‘similar establishment’ should be given a purposive construction in that the hotel sector is primarily given over to temporary accommodation. Finally, a functional approach should be adopted asking whether the accommodation is in potential competition with the hotel sector.

What made the accommodation similar?

The key factor regarding exclusion was the purpose of the accommodation and its temporary nature, which made it similar to a hotel. HMRC argued that residents were subject to a selection process and could not just turn up like members of the public and the physical layout of the hostel with its communal areas differed from a hotel.

The FTT rejected both these points. The EU principles of equal treatment and fiscal neutrality were met in that CYL operated a hostel providing temporary accommodation similar to a hotel or other establishment so for instance if CYL could not accommodate a homeless young person then most likely they would end up in a hotel.

To that effect the FTT allowed the appeal.

Summary

The FTT took a wide view of the term ‘temporary accommodation’ given that over two-thirds of residents stay for longer than six months and whether such accommodation is really similar to say a budget hotel is debatable.

Was the FTT also correct in disregarding Clause 7 and putting its eggs in the basket of economic reality? Exclusion from the exemption would also have meant that CYL could not take advantage of the reduced rate VAT treatment during the pandemic.

It would be surprising if HMRC did not appeal this decision, given the nuances surrounding the crucial issues.

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