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No room for debate in apartment rental VAT case

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This tribunal involved the supply of serviced apartments and whether they were similar to a hotel or qualified for exemption from VAT.

2nd Apr 2024
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Realreed is a company that owns a property in London called Chelsea Cloisters. The property contains studio, one-bedroom and two-bedroom apartments and this first tier tribunal (FTT) case concerned the letting of 235 of them. Realreed had treated rental income in respect of the apartments as exempt from VAT. 

While additional services were provided, this was a separate supply to the tenants by Chelsea Cloisters Services Ltd (CCSL), an associated company. That supply of services was treated by CCSL as standard rated.

HMRC contended that the rental income was standard rated and so VAT was underdeclared. The VAT at stake in this first tier tribunal (FTT) case was well over £4m.

Sleep on it

Residential lettings are exempt from VAT by virtue of VATA 1994, Schedule 9, Group 1, Item 1.

The legislation (Item 1(e)) carves out from the exemption, and so standard rates, “the provision in a hotel, inn, boarding house or similar establishment of sleeping accommodation…”

Note 9 to group 1 expands on this saying: “Similar establishment includes premises in which there is provided furnished sleeping accommodation, whether with or without the provision of board or facilities for the preparation of food, which are used by or held out as being suitable for use by visitors or travellers.”

Checking in 

A significant number of those occupying the apartments are staff of corporations such as banks, where they relocate their employees to London for a specified period, such as a secondment.

A lot of these bookings take place online via intermediary booking websites such as booking.com and Expedia as that is the way customers search for accommodation these days.

Dr Charles Moran, chairman and CEO of the appellant’s parent company, the Chesterlodge Group, described the business model: “Chelsea Cloisters operates like a ‘home from home’ for its tenants: it provides residential accommodation. The physical appearance of the building is very similar to that of other residential buildings in the vicinity. It does not have signage suggesting the serviced accommodation is a hotel or similar establishment. It is rare for hotels (or similar establishments) at the booking point to offer long-term availability in the same way as Realreed does from the outset. 

“Chelsea Cloisters does not offer room service, or catering of any form, linked to the apartments. Tenants have fully functioning kitchens and other self-catering facilities within their apartments and have washing machines and dryers to do all their own laundry. Charges are not made on a per person basis, and there is no additional charge for overnight visitors, nor a requirement for visitors to be registered, as might be the case in a hotel.”

Tenants can stay for extended periods of time, they are not just short-term stays.

At your service

CCSL provides a maid service, dry cleaning, wi-fi, luggage storage and various other services, and charges VAT on these. No services are provided by Realreed.

The case report refers to different versions of the Realreed website. One says that Chelsea Cloisters issues the following services:

  • 24-hour reception, security and porters 
  • maid service 
  • dial telephone and message-taking service 
  • satellite television with 30 channels featuring 12 languages 
  • three international restaurants 
  • residents’ bar 
  • extensive range of business services 
  • residents’ parking 
  • hairdressing and beauty salon 
  • babysitting and cot hire 
  • laundry and dry cleaning 
  • theatre reservations 
  • newspaper delivery 
  • boardroom hire 
  • welcome pack on request.

Supply chain

The court looked first at the starting point for all VAT questions – who is supplying what to whom?

They concluded that:

  1. Realreed supplies accommodation in apartments to occupiers.
  2. There is a promise by Realreed to the occupiers that ancillary services will be provided.
  3. CCSL provides those ancillary services.

The question the court then addressed is whether Chelsea Cloisters is a similar establishment to a hotel.

While Realreed argued that the main issue here was the fact that they supplied the sleeping accommodation only, and the services were provided by CCSL, the court said this was not relevant.

“We accept entirely that Realreed is letting the apartments and that this is all it is doing, but we do not accept that services supplied by a different person (CCSL) are to be left out of account, when deciding whether the place where Realreed makes those supplies is a similar establishment to a hotel, just because they are made by another person… Although delivered by CCSL, those services are a part of the “offering” at Chelsea Cloisters and, on our analysis of the contractual arrangements, something Realreed commits to. In our judgment, these factors demonstrate the required degree of permanence, scale and stability for us to take the services provided by CCSL into account in deciding whether Chelsea Cloisters is an establishment similar to a hotel.”

The conclusion was that Chelsea Cloisters is an establishment similar to an hotel and so all the rental income is VATable.

Replies (5)

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Ivor Windybottom
By Ivor Windybottom
02nd Apr 2024 17:33

Given the amount of VAT at stake (£4,572,415 + penalty + interest), an appeal is presumably very likely?

Thanks (1)
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By Paul Crowley
02nd Apr 2024 17:47

This looks like business splitting to me. The services were deliberately supplied by an associated company.
Hotels are able to zero rate on long stays.
Is this any different to AirB&B if we look at just the room let?
I am sure that my comments were matters that the original advisors would have considered in setting this one up.
The chart of services looks quite like what would be normal for a hotel to me. Residents' bar and restaurants in particular.
I say good decision. If successful this would be a model to copy for future hotel accommodation.

Thanks (1)
Replying to Paul Crowley:
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By Paul Crowley
02nd Apr 2024 23:14

Exempt, not zero.

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By FactChecker
02nd Apr 2024 20:27

Yay ... another win for the WISWTW approach (on the surface).

Actually I see it more as a loss for corporate greed (in the shape of the Chesterlodge Group and whoever is funding that vehicle) ... you can't have your cake and eat it.
The 'old' Chelsea Cloisters of my youth (the '60s) were an old-fashioned leftover of pre-war Chelsea - trying to ignore the activities in King's Road and not noticing 'til too late some counter-cultural residents arriving in their midst - e.g. Syd Barrett) - but they were unequivocally medium to long-term rentals with no 'service' concept.
So trying to claim that's what they still are whilst simultaneously promoting the concierge-like facilities took two-faced to a new level.

Thanks (3)
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By petestar1969
04th Apr 2024 16:08

Nice try, bad luck.

Thanks (0)