The VAT treatment of licences to occupy land is often difficult and isn’t helped by an inconsistent approach from HMRC and the guidance it publishes. This technical briefing looks at the ramifications of the latest Tribunal case on the subject – Blue Chip.
The VAT rules on licences to occupy apply across all sectors; public bodies have no special place in the rules.
However, it is the range of different types and number of licences issued by public bodies that makes their position unique. It is probably the most frequent question a public body VAT practitioner has to answer: do we charge VAT on this room hire or trading licence or wedding venue or sports let or concession or market and so on, and so on…
PSTAX is working with HMRC, CIPFA and the Land and Property Group to investigate the merits of some specific and clear guidance for public bodies. We’ll update clients on this project when there are developments.
The background to the need for specific guidance is the numerous decisions in the last few years from the Tribunals and Courts; some of them (but only some of them) have helped clarify the position. However, the clear trend is the narrowing of the availability for VAT exemption for licences to occupy land. This isn’t reflected in existing HMRC guidance and it is inconsistently seen in the approach HMRC officials have in their direct transactions with public bodies.
The latest decision is in the appeal to the Upper Tribunal (“UT”) in the case of Blue Chip. We have discussed at Forums and elsewhere the decision of the First Tier Tribunal (“FTT”) in this case.
Blue Chip owns and operates a large hotel in Newquay, Cornwall. A room in the hotel is approved as premises in which civil marriage ceremonies can take place. Some other parts of the hotel can be used for wedding receptions and some customers hold both the ceremony and the reception in the hotel.
Blue Chip treated the hire of the approved room as an exempt supply of land.
The FTT decided that the supply of the approved room was a separate supply for VAT purposes, even if it was sold as a part of a ‘wedding package’. A wedding package typically included the wedding ceremony and other services, such as catering and the hire of other rooms.
HMRC did not appeal against this part of the FTT’s decision. What appealed was the FTT’s decision that the supply of the approved room was not an exempt supply of land.
HMRC guidance on the VAT exemption for a licence to occupy land requires four conditions to be met, namely that the licensee has:
- a defined area of land;
- for an agreed duration;
- in return for payment; and
- has the right to occupy that area as owner and to exclude others from enjoying that right.
However, CJEU case law (the judgment in Belgian State v Temco Europe SA: Case C-284/03) set four slightly different conditions. The supply must:
- confer on the tenant the right to occupy the property as if the tenant were the owner;
- allow the tenant to exclude from the enjoyment of such a right any persons who are not permitted by law or by the contract to exercise a right over the property;
- be for an agreed period which may be restricted but must not be occasional and temporary; and
- be in return for payment.
Therefore, the letting can still be considered exclusive for the purposes of the conditions for exemption if other people can occupy the property under rights conferred by law or by the contract.
However, the FTT decided that the hire of the approved room did not meet the exclusivity conditions for VAT exemption. A wedding is a public event and members of the public are entitled in law to attend the ceremony. The FTT concluded that this meant the hirer did not have the “exclusivity” required for the VAT exemption.
The UT observed that although a customer could not assert exclusivity and prevent members of the public from exercising their rights of access to the approved room, this fact alone did not prevent the occupation from having the exclusivity required for the exemption. The right to “exclusive occupation” is not synonymous with sole occupation against all others. As laid down in Temco, if the right of occupation is through law or contract, the letting can still be granting rights of exclusivity. Here, the right for members of the public to occupy the room arose through law.
On this point, the UT decided that the FTT had made an error in law.
However, the UT went on to consider (again referring to Temco) whether Blue Chip provided in the supply more than a:
“relatively passive activity linked solely to the passage of time and not generating any significant added value”.
If a landlord does more than simply make property available to the tenant for a period and actively exploits it to add “significant value” to the supply, it cannot be regarded as the right to passive occupation. In Blue Chip, the significant value added was the fact that the occupation was of an approved room. Blue Chip had to meet the obligations imposed on it by the Approved Premises Regulations; it had to ensure the room was supervised, making a responsible person available for the duration of the hire and providing a room for the proceedings that was “seemly and dignified”.
The UT considered that this was a more complicated service than simply making the property available to the customer for a period; Referring to another CJEU judgment (C-55/14 Regie communale autonome du stade Luc Varenne v Etat Belge), the UT decided that Blue Chip’s role was “more active than that which would arise from a mere letting of immovable property”. Blue Chip had actively exploited the room by getting approval for its use for the solemnisation of marriages and the formation of civil partnerships and performing all the required activities to maintain such approval. This active exploitation added significant value to the supply of the room. As such the hire of the room could not be exempt from VAT.
The Blue Chip decision has added a degree of certainty that was hitherto lacking in this area. There are two important principles that have been reaffirmed in an unambiguous way.
First, in relation to the exclusivity condition for the exemption, exclusivity can be considered undisturbed even if others have right of occupation, provided those rights are granted by law or contract. Exclusivity does not mean sole occupation.
Secondly, if anything of significant value is added to a letting, it cannot be considered an exempt licence to occupy. Whether this condition is met will be more difficult to judge as it is inherently subjective.
In Blue Chip, the active exploitation of a room was considered to add significant value.
Often the hire of a room is advertised to have features that:
- are unusual, such as unique settings, or attractive and interesting views
- integrate social media conversations, web-based audience participation, virtual attendance
- have new and cutting-edge technology features
- are eco-friendly, such as using recyclable materials recycled paper, fair trade catering, sustainably sourced power
- are notably luxurious
- provide high-class catering in the room or in break-out areas
Are these examples of active exploitation? Is the test, perhaps, how the room hire is “held out for sale”? This is a concept found elsewhere in the UK VAT system (food, animal feed and pet food, children’s clothing, etc), but has never been applied to supplies of land.
There are also other types of supply that seem to fail the “significant value” test yet are considered by HMRC to be exempt. For example, HMRC considers the following to be exempt licences to occupy land:
- the provision of a specific area of office accommodation, such as a bay, room or floor, together with the right to use shared areas such as reception, lifts, restaurant, restrooms, leisure facilities and so on
- the provision of a serviced office but only where the use of phones, computer systems, photocopiers etc. is incidental to the provision of office space
- granting a concession to operate a shop within a shop, where the concessionaire is granted a defined area from which to sell their goods or services
- granting space to place a fixed kiosk on a specified site, such as a newspaper kiosk or flower stand at a railway station
- hiring out a hall or other accommodation for meetings or parties and so on (but not wedding or party facilities where the supplier does more than supplying accommodation, for example by assisting with entertainment and arranging catering). The use of a kitchen area, lighting and furniture can be included.
- granting a catering concession, where the caterer is granted a licence to occupy a specific kitchen and restaurant area, even if the grant includes the use of kitchen or catering equipment
These examples are from HMRC Notice 742 and all seem to add significant value to the supply of the room or space, either by the facilities provided or by active exploitation of the venue (for example, the shop-in-shop actively exploits that fact the licensees will have a space that will guarantee footfall and a target customer base for their products).
We do not know what will be HMRC’s reaction to Blue Chip, but it is hoped that guidance and practice is updated to reflect the principles reaffirmed in the judgment.