Serviced apartments – a new approach for VAT?
Recent tribunal decisions have cast doubt on the VAT treatment of serviced apartment lets, taxi rides and other activities that can be part of a holiday. Businesses providing and receiving these services may need to reconsider how they account for VAT on their income, and some may wish to make protective VAT claims.
The traditional model
The UK VAT treatment of supplying a serviced apartment is complex – but has, until recently, at least been well-established.
If an operator provides a long tenancy (thirteen weeks has typically been seen as the cut-off), especially where any associated services provided are fairly minimal, HMRC accept this is no different from a normal flat rental and is exempt from VAT.
If an operator lets a serviced apartment for a short period, this is treated in the same way as a hotel room and subject to 20% VAT. However, if the occupant stays for more than four weeks, then from Day 29 a reduced value rule applies which normally means the VAT rate effectively drops to 4%.
In the former scenario, no VAT is chargeable to guests, but no VAT can be recovered. In the latter, VAT would need to be added to charges, but the operator can recover VAT on costs. Which model is more favourable for long-staying guests will depend on whether the customer can recover VAT and what VAT is being incurred on costs. However, as the operator’s main cost, the lease of the flat from the landlord, should be exempt from VAT, the difference is often minimal.
Commission model
The emergence of Airbnb and similar suppliers has caused a significant challenge to hotels and serviced apartment operators renting to holidaymakers. These companies provide certain services to introduce a flat owner to a customer but very often the service of renting the flat is provided by the owner directly to the customer. While that income is still taxable, each flat owner’s income is typically below the VAT registration threshold of £85,000, so they do not need to charge VAT.
This model is not dissimilar to that operated by Uber, Bolt and other taxi ride hailing apps. HMRC has successfully challenged that these companies are operating as a principal, employing the drivers, and latest accounts include large provisions for VAT that may be due, as well as holiday pay, etc. However, a fourth way of looking at the VAT position has recently been put forward.
Tour operators
A scheme exists to simplify the VAT treatment of package holidays – the Tour Operators Margin Scheme (TOMS). To avoid tour operators having to complete VAT returns in several countries they can instead, broadly, not recover VAT on their costs or pay it on the price charged but simply account for VAT on their gross margin.
The courts have held that TOMS can apply to a single service, provided it is one that is typically offered to travellers and that it is bought in and supplied on without material alteration. In Sonder the First tier Tribunal held that it applies to a serviced apartment operator renting short stay flats. More recently, a similar judgement was reached in Bolt for taxis.
Winners and losers
The TOMS approach is preferable for suppliers whose market is individuals who cannot recover VAT, especially where a supplier’s main cost does not include VAT. Taking a simple example:
| Income/cost | Traditional model | TOMS approach | |
| Charge for room = £1,200 (including VAT) | Net Income = £1,000 | Gross income = £1,200 | |
| Lease of flat = £500 (exempt) | Net costs = £800 | Gross costs = £860 | |
| Operating costs = £300 + £60 VAT | Net VAT due = £140 | VAT due on margin = £57 | |
| Profit = £200 | Profit = £283 |
However, if the customer can recover VAT, the position would be different. In the above example, say the operator was able to charge a corporate client £1,200 plus VAT. A customer cannot recover VAT on a supply made under TOMS, so a TOMS operator would have to keep the total charge the same, but the traditional operator could add VAT. The figures would become:
| Income/cost | Traditional model | TOMS approach | |
| Charge for room = £1,200 + £240 VAT | Net Income = £1,200 | Gross income = £1,200 | |
| Lease of flat = £500 (exempt) | Net costs = £800 | Gross costs = £860 | |
| Operating costs = £300 + £60 VAT | Net VAT due = £180 | VAT due on margin = £57 | |
| Profit = £400 | Profit = £283 |
What next?
HMRC have not issued any formal brief giving a view on this matter but in seeking to appeal Sonder and also having succeeded with taking Bolt to the Upper Tribunal it seems very clear that they disagree TOMS should apply. Given the amounts at stake, this litigation may be ongoing for some years.
In the meantime, serviced apartment operators and other suppliers in a similar position to Sonder or Bolt may wish to make protective claims if their services could potentially fall within TOMS. Some will want to consider revising their operating model if it appears they could lose a competitive advantage.
Conversely, those operating in the corporate market for whom the status quo is preferable may also want to review their arrangements to ensure that they can be differentiated from these cases if the taxpayers are successful.
If you would like to discuss this further, please get in touch with Adam Cutler, or your usual Crowe contact.
Adam Cutler discusses further points on this issue in Serviced Apartments News, which was published on 1 March 2024.
