Realreed Limited v HMRC Case Law: VAT Liability for Serviced Apartments and Carelessness in VAT Returns Submission

Citation: [2023] UKFTT 1042 (TC)
Judgment on

Introduction

In the recent case law of Realreed Limited v The Commissioners for HM Revenue and Customs (HMRC) [2023] UKFTT 1042 (TC), the UK First-tier Tribunal (Tax Chamber) provided a detailed analysis of the Value Added Tax (VAT) liability for supplies of serviced apartments, and the assessment of carelessness in the submission of VAT returns by a taxpayer. This article will dissect the legal discussions and decisions made by the tribunal to elucidate the legal principles applied and the outcomes of the case.

Key Facts

Realreed Limited, the appellant, owns Chelsea Cloisters in London, a property comprising self-contained apartments, part of which are let out on either assured shorthold tenancy (AST) terms or guest registration form (GRF) terms. The issue in question pertains to the VAT treatment of the letting of these apartments, which Realreed contended should be exempt from VAT under Item 1, Group 1, of Schedule 9 to the Value Added Tax Act 1994 (VATA 1994). Chelsea Cloisters Services Limited (CCSL), which shares common ownership with Realreed, separately provided related services, treated by them as taxable at the standard rate.

HMRC contended that Realreed’s services should fall under “the provision in a hotel, inn, boarding house or similar establishment” per Item 1(d) of the said Schedule, thus subject to standard VAT rate. Furthermore, HMRC challenged the carelessness of Realreed in submitting its VAT returns under paragraph 1, Schedule 24, Finance Act 2007.

The Tribunal addressed several legal principles throughout the decision:

  1. The Scope of the VAT Exemption and Hotel Sector Exclusion: The tribunal considered how the exemption for “the letting of immovable property” in the Sixth Directive and PVD should be interpreted. This included an analysis of what constitutes a similar establishment to a hotel, the temporary nature of accommodation, and the provision of additional services in connection with the accommodation.

  2. Use of Accommodation by “Visitors or Travellers”: The term “visitors or travellers” specified in Note 9 to Group 1 was central to this judgement, as it influenced whether the premises could be considered a similar establishment to a hotel or a boarding house, potentially excluding it from VAT exemption.

  3. Interpretation of “Sleeping Accommodation”: The Tribunal explored whether the nature of the lease (AST or GRF) affected the VAT treatment. This involved understanding whether the duration or formalities of the letting altered the nature of the supply.

  4. Paragraph 9 of Schedule 6 to VATA: This provision, applicable to long stays in hotels, adjusts the value of the supply for VAT purposes after 28 days. It was assessed whether this provision could affect the VAT treatment of services provided by Realreed.

  5. Reasonable Care Under Schedule 24 of the Finance Act 2007: The Tribunal analyzed what constituted ‘reasonable care’ when submitting VAT returns, taking into account the behavior of a prudent and conscientious taxpayer.

Outcomes

The Tribunal concluded that:

  • The provision of Chelsea Cloisters’ apartments, on both AST and GRF terms, was akin to a supply of accommodation in a similar establishment to a hotel, subject to VAT.
  • Realreed Limited’s letting of apartments, regardless of the terms (AST or GRF), is excluded from the VAT exemption by virtue of falling under paragraph (d) of Item 1, Group 1, Schedule 9 VATA.
  • When Paragraph 9 of Schedule 6 VATA comes into effect, it operates essentially to standard rate the value of Realreed’s supply at 20% after an occupancy exceeds 28 days, regardless of CCSL’s separate services.
  • Realreed did not take reasonable care in its VAT return submissions, rendering it liable for penalty under Paragraph 1 of Schedule 24 to the Finance Act 2007.

Conclusion

The Tribunal’s meticulous assessment in Realreed Limited v HMRC established a clear exposition of the application of VAT law to serviced apartment lettings, reinforcing the delineation between exempt and standard-rated VAT supplies within property leasing. Additionally, it affirmed the rigorous standard expected of taxpayers in exercising reasonable care in VAT submissions. This case acts as a directive for businesses engaged in similar ventures to carefully analyze their VAT obligations, as well as an affirmation of the extensive discretion accorded to HMRC in their evaluative and corrective capacities as tax authorities.