Many business owners sublet part of their trading premises to earn income, especially as more employees are now homeworking. Rental income is exempt from VAT as a land supply, but could additional services provided mean you have a VAT issue?
Exemption for land supplies
Most land supplies are exempt from VAT. This means that you will not charge VAT on your rental income in most cases but are blocked from claiming input tax on your related expenses under the rules of partial exemption.
With regard to rental income earned from non-residential properties, you can opt to tax your interest in the building with HMRC – usually by completing FormVAT1614A – so that your future rental income will be standard-rated, and you can claim input tax. However, you should be aware that an option to tax election remains in place for 20 years once it has been made, so VAT will be charged on both rental income and the future sale of the building.
Pro advice. You cannot assume that all of your land supplies will be exempt from VAT because there are many exceptions listed in the legislation where the exemption is overridden. Examples include hotel accommodation or similar; storage facilities; car parking charges; chair-rental arrangements for hairdressers; camping and caravan facilities. In these situations, your income will always be subject to VAT.
Extra services?
If you are renting out part of their building – even just a room – you need to stand back and ask two questions:
- Are you supplying more than just land or space to your tenants or users?
- What benefits are the tenants getting when they pay their money?
- The answer to these questions will often determine whether you are making a VAT-exempt land supply or a standard-rated supply of other facilities.
Example. Alice is VAT registered and owns a recording studio. A local pop group wants to hire her studio for two days and use all of the recording equipment in the room to record their next album. In this situation, it is the equipment hire that will be the main benefit required by the group, and not just an empty room. Alice will charge VAT on her fee.
Example. Acom Angling Club wants to hire a room at a local hotel to hold its Annual General Meeting. The committee has asked the hotel to arrange for 50 chairs and ten tables to be set up in the room. In this situation, the tables and chairs are classed as normal furnishings in a typical room – they are not a separate supply in their own right, unlike the recording equipment. The hire charge by the hotel will be exempt from VAT unless the hotel owners have opted to tax their building.
Pro advice. The total fee charged for an arrangement is often a clue as to whether a supply is for more than just land. For example, the total charge for the recording studio will almost certainly be higher than the meeting room in the hotel.
Car boot pitches
The First-tier Tribunal (FTT) case of Rufforth Park Ltd v HMRC [2022] TC8395/V had a good outcome for the directors because the judge agreed that the company’s fees charged to vehicle owners for pitches at Sunday morning car boot sales were land-related supplies, i.e. exempt from VAT. However, HMRC claimed that the reputation of the event, the advertising to promote it online and via Facebook, as well as the café and toilet facilities, meant that the pitch fees were standard-rated. HMRC issued an assessment for £82,995 for periods December 2016 to March 2019 plus interest.
The FTT decided that it was inappropriate for HMRC to compare the arrangement to a pitch provided at a trade fair. Such events were expertly organised, and the organisers provided significant added value for the pitches, hence why their fees were standard-rated rather than exempt. The taxpayer only provided a field and – to quote the director – “an ordinary car boot” .
Pro advice. HMRC’s strategy in this case is worrying because its own guidance at VAT Notice 742 says that fees for car boot pitches are exempt from VAT. You need to be very clear that your supply is for passive land, and that any extra benefits are incidental to the land supply, to avoid a potential challenge from HMRC in the future.
Venue hire
In the case of Best Images Ltd v HMRC [2010] TC0480, an officer from HMRC queried why a hotel was charging a five-figure fee (no VAT) to a couple getting married to hire a conference room for their wedding reception. The reality was that the hotel was providing more than “just a room”, including security staff, drinks on arrival, catering supplies, assistance with the organisation of the event, a cleaning service and music. The FTT agreed with HMRC that the company was not conducting the passive activity of letting land. The fee was standard-rated.
Pro advice. When deciding the VAT liability of any source of income, the key issue is always the commercial reality of what is being supplied. You must not think that using certain words on your sales invoices such as “rent” or “room hire” is enough to guarantee VAT exemption if the commercial reality of what they are supplying is different. To quote the judge in the Best Images case: “ …for a typical customer, its activities went far beyond merely providing the key to a door. ”
Features of a land supply
A tenant or user of a property must have exclusive use of the area of land in question as a condition for VAT exemption. For example, some retailers might have shop-in-shop arrangements at their stores, whereby other retailers get a specific square footage area to sell their goods or services. Their exclusive use of this space clearly meets the condition of a land supply. However, if a retailer allows another business to, say, use “any table and chair” on the premises to sell its goods or services, this is not a land supply. In this situation, the retailer is giving the other business the right to trade, which is standard-rated.
Pro advice. Tribunal judges have considered three other main features of a land arrangement: there must be a clearly defined area of land being rented out; the rental period must have an agreed period of time; there must be payment by the tenant for use of the area in question.
Facilities v room hire
The key issue in the recent case of Errol Willy Salons Ltd [2022] TC8370/V (see Follow up ) was whether two self-employed beauticians trading on the premises of a hairdressing salon were paying for standard-rated services from the salon or an exempt supply of rent for the rooms they used. HMRC issued the company with an assessment for £18,649, treating supplies to the beauticians as a standard-rated supply of salon services rather than an exempt supply of land. The rooms occupied part of the first floor of a two-floor building.
HMRC argued that it was not clear that the beauticians could solely use the rooms for their business activities. However, the FTT said that a joint-use arrangement was unlikely because the beauticians carried out personal waxing services where privacy was needed. The assessing officer also claimed that there was no specified time period, but the FTT said there was clearly a monthly arrangement in place that rolled forward.
The FTT also considered whether the beauticians received other services from the salon which were more significant than the use of the rooms. However, the reality was that there was only a sink in the rooms and the beauticians provided their own equipment and towels and also cleaned the rooms themselves. There was a single supply of rent, which was exempt from VAT as a land supply. The appeal was allowed.
Pro advice. The other outcome considered by the judge in this case was whether a turnover-based charge to the tenants could qualify as “rent”. Such arrangements have been common for many decades in the pub trade, where tenants pay breweries a variable rent based on their monthly bar sales. The judge saw no problem with a turnover rent, which is reassuring.
You must consider if you are just acting as a passive landlord hiring out space or whether you are providing extra benefits to the users which will be subject to VAT. Minor benefits such as tables and chairs in a room can be ignored. However, just describing sales invoices as “rent” does not solve the problem.
The next step
Best Images Ltd v HMRC [2010] TC0480
VAT Notice 742
HMRC Guidance: VAT1614A
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.