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Is there VAT on short term rentals?

By October 12, 2023January 9th, 2024Customs Duty news|VAT news
short term accommodation vat

The travel sector continues to face VAT challenges in certain areas, with a couple of recent cases coming to Tribunal that potentially have broad relevance within the travel and accommodation sector.  If nothing else they serve as a reminder of the many pitfalls and complexities these industries face with many area of VAT law and guidance overlapping and needing to be considered.

Short Term Accommodation and VAT

The Sonder Europe tribunal case focused on the scope of the Tour Operator’s Margin Scheme (TOMS) – an EU wide VAT simplification that also continues to apply within the UK post Brexit albeit with tweaks.  Sonder rents out serviced apartments on a short term basis and these are deemed to be ‘holiday accommodation’ (this would be appropriate for example if the apartments are advertised on websites such as Booking.com, Airbnb etc to drive business).  This pulls the business out of the sphere of the normal domestic property rental VAT rules (where the property rental would potentially be VAT exempt depending on the degree of services) and into the travel VAT rules.

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These rules can be complex, with many issues to consider in determining the appropriate subset of VAT rules to use.  TOMS is to be used if a business ‘buys in and onsells designated travel services from 3rd parties without material alteration’.  There is lots to pick apart in this definition, but of relevance to Sonder is the question of what ‘material alteration’ means.   Sonder typically rented unfurnished accommodation and added furniture and decorated where necessary to bring the accommodation to the requisite standard.   HMRC took the view that they were not on-selling exactly what they had ‘bought in’ per the definition, and therefore they must have ‘materially altered’ the accommodation.  Crucially the impact here would be that the normal VAT rules would apply instead, so VAT incurred on costs would be fully recoverable whilst VAT would be due on the full selling price @ 20% (the accommodation is in the UK).  However given the rental of the flats from the 3rd party landlord would be VAT exempt, there would be no input VAT to offset against the VAT due on the full selling price, significantly increasing the cost of VAT to the business against what it would be with TOMS.  HMRC lost the case and the Tribunal found that the changes made to what was ‘bought in’ were not material in terms of cost or in terms of changing the nature of what had been bought in to something different, and therefore TOMS could apply.  HMRC are appealing which is not surprising given the size of the market in such accommodation.

Businesses with the following profile should review their VAT position to ensure the correct VAT rules are being applied:

  • does the business account for VAT using TOMS but make alterations to the accommodation or passenger transport bought in from a 3rd party before on-selling it? This applies within and outside the UK;
  • is the business involved in providing short term let accommodation that is advertised on sites such as Booking.com, Airbnb;
  • if the business believes it is acting as a disclosed agent for VAT purposes, meaning the underlying sale of accommodation or passenger transport is between the owner and customer, do the contractual arrangements and documentation support this?

Realreed was a business letting out serviced short term accommodation that was assessed by HMRC.  Realreed had treated the revenue as VAT exempt whereas HMRC took the view it was held out for sale/advertised or similar to hotel accommodation and was therefore subject to 20% VAT.  The issue in this case related to ‘misdirection’ by HMRC as the business had had numerous VAT inspections by HMRC and none of the officers took issue with VAT exemption being applied.  The High Court  determined that Realreed could not rely on the concept of ‘Legitimate Expectation’ and HMRC were entitled to assess for underdeclared VAT.    It has always been difficult to persuade HMRC that they are in the wrong in relation to advice/guidance they have previously given during assurance visits which is later overturned by a subsequent HMRC officer.  This case perfectly reflects the risk for businesses operating in the B2C sector and treating their revenue as VAT exempt when a different analysis might apply.  In these cases it would be wise to ensure specialist VAT advice has been taken to provide reassurance.

 

TOMS versus Normal VAT Rules

The issue of the TOMS scheme versus the normal VAT rules reared its head recently in a decision involving Golf Holidays Worldwide Ltd.  In this case the company submitted an ECN (error correction notice) to HMRC on the basis it had overdeclared VAT under TOMS when it could have used the normal VAT rules for the wholesaling of golf holidays to overseas customers.   Following an ECJ decision in 2013, HMRC issued guidance stipulating that TOMS or the normal VAT rules could be used for wholesale supplies.  The choice of TOMS versus the normal VAT rules hangs on a legal technicality pre Brexit whereby UK taxpayers were able to rely on EU VAT law (ie ECJ decisions) if it suited them, but equally could rely on UK provisions if preferable.  In relation to wholesale travel supplies, HMRC guidance prior to the ECJ decision stipulated that the normal VAT rules should be used rather than TOMS.  The ECJ disagreed.  Golf Holidays Worldwide lost its case, with the Tribunal deciding it was not able to change to using the normal VAT rules once it had decided to use TOMS, even though HMRC guidance specified that either could be used.  The question arises as to what the UK guidance should now say in relation to wholesale activities given we are now in a post Brexit environment and this decision has made it clear businesses apparently cannot change their mind about which rules to follow once an initial decision has been made.    This decision emphasises the need to choose the appropriate regime carefully when a choice is available.

For businesses operating in B2C environment and treating their revenue as VAT exempt or zero rated, it can be potentially catastrophic to be in the position of revenues suddenly being deemed to be subject to VAT (including historically back 4 years where relevant).  Where there is any doubt or possibility of the revenues being viewed in a different way, it is worth taking advice from a VAT specialist to be certain of the position.

The CJEU considered the case of C. sp. z o. o against the Polish tax authorities.  This company bought in holiday accommodation from 3rd parties and onsold it to business customers.  The Polish tax authorities took the view that TOMS did not apply despite the scenario appearing to fit the definition above, ie ‘buys in and onsells designated travel services from 3rd parties without material alteration’.  Their argument was that the business did not provide a complex package of services so the TOMS simplification, which significantly reduces the number of countries in which travel businesses need to register for VAT, was not required.  The CJEU agreed with the taxpayer, finding that TOMS did apply.  Whilst this case is unlikely to have wider application in the sense of most tax authorities agreeing TOMS would apply, it does serve as an example of how lengthy litigation can ensue (a delay of 5 or more years to get to CJEU stage would not be uncommon) in situations where a challenge arises.

The VAT Consultancy is highly experienced and provides relevant and practical advice to help you deal with the VAT and customs duty issues your organisation faces. We provide global VAT and customs duty advice for tour operators, travel agents (including OTAs), bedbanks, business travel agents, online marketplaces for short term lets and events organisers. To discuss how we can help contact us today.