CYL provides temporary accommodation for young homeless people, in two hostels. At the time of the dispute, CYL was only operating one of these, as its other hostel was under construction, having been previously demolished.
With HMRC’s agreement, CYL had been treating hostel accommodation as exempt on the basis that it was ancillary to the provision of welfare services to the occupants. In 2010 CYL ceased to provide welfare services and wrote to HMRC, who confirmed that the hostel accommodation would then be standard rated. This was on the basis that it was within the exemption for supplies of land, but also fell into the exclusion (Item 1 (d)) which applies to accommodation provided in establishments which are similar to hotels, inns, and boarding houses.
That meant that CYL could apply the so called ‘28-day rule’, which allows for a reduced VATable value to be applied to hotel stays exceeding 28 days. This results in an effective VAT rate of 4% whilst still allowing for full deduction of VAT on costs.
The position remained unchallenged until 2017, when a visiting HMRC officer advised that the supply of accommodation should be exempt under the welfare services provision. This triggered a chain of correspondence between the parties during which HMRC first agreed to withdraw its exempt ruling and reinstated the 2010 ruling; but then, following a policy review, decided in March 2019 that under the terms of the agreement with its tenants, CYL was not granting a ‘licence to occupy’ land. This HMRC argued, meant that CYL’s hostel accommodation could not fall within the land exemption, and thus it could not be treated as standard rated under the exclusion for hotels and similar establishments. HMRC therefore argued CYL was making taxable supplies and the 28-day rule could not apply. If HMRC was right, CYL would also not be entitled to apply the temporary 5% reduced rate for accommodation introduced to support businesses during Covid.
In reaching its decision, HMRC argued that a licence to occupy land required the tenant to have “exclusive possession” and relied heavily on the terms of the tenancy agreement and in particular clause 7 which states:
This agreement is not intended to confer exclusive possession on the Licensee nor to create the relationship of landlord and tenant between the parties. The Licensee shall not be entitled to a tenancy, or to an assured shorthold or assured tenancy, or to any statutory protection under the Housing Act 1988 or to any other statutory security of tenure now or upon the determination of the Licence.
HMRC also pointed to clauses that allowed CYL to access tenants’ bedrooms in specific circumstances and the right of CYL to change tenants’ rooms. HMRC raised an assessment for VAT underdeclared and CYL appealed.