VAT implications for charities providing accommodation

A recent tribunal hearing on a VAT case brought against a charity by the HMRC could have important implications for charities that provide accommodation. If you are such a charity it is vital to ensure that you are set up in the most VAT-efficient way possible.

A summary of the tribunal findings is given below.

HMRC have failed in their attack on a charity providing hostel accommodation to the homeless. The first-tier tribunal have recently found in favour of City YMCA London (CYL) regarding the VAT treatment of rent from homeless people in their hostels. There was no supply of welfare services so the welfare exemption for charities did not apply to CYL’s income. The case focused on whether the tenant had exclusive possession similar to a licence to occupy land which would result in the accommodation being treated as similar to hotels and boarding houses and therefore standard rated but being eligible for the 28 day rule to exempt the income for the accommodation element after the 28th day whilst still allowing for full deduction of input VAT. Being a hotel or similar would also allow CYL to make use of the COVID-19 temporary reduced rates applied to hospitality - 5% between 15 July 2020 and 30 September 2021 and 12.5% between 1 October 2021 and 31 March 2022. 

Following an inspection, HMRC decided that the agreements with the tenants did not meet the conditions to be treated as a licence to occupy and could not fall under the hotel and similar rules. VAT at 20% was therefore due with no reduced rates applicable. This would have meant a substantial increase in the amount of VAT payable and therefore CYL appealed to the first-tier tribunal. The tribunal found in favour of CYL ruling that contractually there was a license to occupy the accommodation and the hostels’ purpose and function was similar to a hotel. We are waiting to see if HMRC appeal the decision.

If you are a charity and supply accommodation, it is important to ensure that the agreements between the charity and the users reflect a licence to occupy arrangement. With this in place the providers, including charities, can take advantage of both the COVID-19 reduction in the VAT rate, to 5% and then 12.5%, as well as the 28-day reduced VAT rule for accommodation suppliers.

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