United Kingdom VAT & Duties Tribunals Decisions

You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Afro Caribbean Housing Assopciation Ltd v Revenue and Customs [2006] UKVAT V19450 (09 February 2006)
URL: http://www.bailii.org/uk/cases/UKVAT/2006/V19450.html
Cite as: [2006] UKVAT V19450

[New search] [Printable RTF version] [Help]

Afro Caribbean Housing Assopciation Ltd v Revenue and Customs [2006] UKVAT V19450 (09 February 2006)

19450

Value Added Tax – Supply of Services – Provision of accommodation for period exceeding four weeks – whether derogation in paragraph 9 Schedule 6 VATA 1994 applies and reduction in tax rate – Tripartite relationship – leasing or letting of immovable property – Appeal allowed

LONDON TRIBUNAL CENTRE

THE AFRO CARIBBEAN HOUSING ASSOCIATION LIMITED Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: DR KAMEEL KHAN (Chairman)

BERNARD J COODE, FFA

Sitting in public in London on 24 November 2005

Ms Valentina Sloane, Counsel, for the Appellant

Mr Andrew O'Connor, Counsel, for the Respondents

DECISION

Introduction

The Afro Caribbean Housing Association ("ACHA") is a non-profit organisation registered under the Industrial and Provident Societies Act 1965. The Rules of Association ("Rules") provide, inter alia, that its objects are to carry on, for the benefit of the community, the business of:

"(a) providing houses or hostels and any associated amenities for persons in necessitous circumstances upon terms appropriate to their means;

(b) providing for aged, disabled, handicapped (whether mentally or physically) or chronically sick persons in need thereof, houses or hostels and any associated amenities specifically designed or adapted to meet the disabilities and requirements of such persons;

(c) providing services, advice or assistance upon terms appropriate to their means to aged, disabled, handicapped (whether mentally or physically) or chronically sick persons in need thereof in arranging or carrying out works of improvement, repair or maintenance to houses occupied by them, and providing any associated amenities specially designed or adapted to meet the disabilities and requirements of such persons".

The ACHA, in order to provide these services, has entered into a number of partnerships with London boroughs, the British Refugee Council ("BRC"), National Asylum Support Services ("NASS"), Housing Association Community Trust ("HACT") and Wandsworth Community Health. These organisations assist refugees/ asylum seekers and the homeless in finding accommodation, they refer them to providers who might provide accommodation.

The ACHA is one of the accommodation providers. They currently lease twenty-five properties from housing associations and others, which they let and manage. Funding is provided by the National Lottery and from contracts with bodies such as the BRC. The ACHA now operates in eight London boroughs and propose to expand two further London boroughs and the north of England.

The BRC is an independent, charitable organisation, which provides advice and assistance to asylum seekers/refugees. It helps asylum seekers/refugees to apply to NASS for subsistence support and helps to access the emergency accommodation by referring them to appropriate providers, including ACHA.

The Appellant entered into an agreement with the BRC on the 11 March 2004 ("Agreement") whereby they agreed to provide to the BRC accommodation services for refugees/asylum seekers in consideration of payments to be made by BRC. The asylum seekers/refugees would be referred after review by the BRC and accommodation would be provided to individual applicants, if available. It was a condition of the Agreement that ACHA would give a Licence (to Occupy) to the actual occupant of the room provided and would be responsible for the eviction of the occupant when their Licence period had expired. The BRC paid a fixed rate for the accommodation provided to the individuals. This Appeal concerns the VAT treatment of the ACHA supply of accommodation to refugees referred by the BRC.

Issues

The main issue is the correct value added tax treatment of supplies of accommodation made by the ACHA to the BRC under the Agreement where the individual asylum seeker/refugee is provided with accommodation for a period exceeding four weeks.

By way of background, transactions relating to land are ordinarily exempt from VAT, although the provision of hotel accommodation is excluded. This is stated in Article 13B(b) of the Sixth Directive and implemented in UK domestic legislation by Section 31 and Item 1, Group 1 of Schedule 9 to the Value Added Tax Act 1994 ("VATA")

Under paragraph 9 Schedule 6 VATA, a derogation from the exclusion for hotel accommodation provides for a reduced rate of VAT where the supply of accommodation exceeds four (4) weeks.

On 28 January 2005, the Appellant submitted a voluntary disclosure, which sought the repayment of overpaid VAT of £227,073 owed for the period between 1 March 2001 and 1 August 2004. This related to supplies of accommodation to individuals referred by the BRC to ACHA, where those individuals had been provided with accommodation by the ACHA for a period exceeding four weeks. The ACHA had mistakenly failed to apply the reduced rate of VAT applicable under the relieving or derogating provisions in paragraph 9 Schedule 6 of VATA. They therefore claimed the difference between what was accounted for and the amount the Appellant say was actually due to the Commissioners. The amount claimed by the Appellant was subsequently amended to £157,628 overpaid VAT (recognising that some of the earlier periods covered by the claim were out of time under the three year limit for repayment pursuant to Section 80 VATA).

The HMRC visited the Appellant on the 8 March 2005 to assess the validity of their claim. It is not disputed that the ACHA provided the relevant accommodation, but the HMRC refused to apply the derogation and repay the VAT and stated in their letter of 8 March 2005 ("the Decision Letter") that "in order to qualify for the reduced rate the supply had to be to the individual occupying the premises".

Appellant's Case

The Appellant's core point is that the Decision Letter mis-states the terms of the derogation in Paragraph 9 Schedule 6 VATA. They say it is not required that the taxable supply of accommodation be made to the individual occupying the premises. It is only required that where a supply consists in the provision of accommodation that provision of accommodation be made to an individual. A distinction is made between the supply and the provision of accommodation.

The Appellants say that a supply of taxable services is a term in the VATA and in a tripartite relationship, as in this case, there can be a taxable supply of services to one person but the service is provided to, and received by, a third party (see WHA Limited v Customs & Excise Commissioners (2003) STC.648) ("WHA Case")). In the WHA case an overseas insurance company appointed a UK company to handle claims and pay repair bills under their insurance policies. The Court of Appeal accepted that the UK claims handling company was entitled to reclaim input tax on supplies made by the garages. They also said that the Company had to account for output tax on its onward supply to the overseas company, which in turn was entitled to reclaim the input tax on those supplies. The court recognised that there was a tripartite relationship between the claims handling company, the garage and the owner of the vehicle where one party was the recipient of a supply, which was provided to another party.

The Appellants point to the rationale for the derogation provisions. They make a distinction between lettings, which is longer term and which qualify for exemption, and hotel accommodation, which is temporary and excluded from exemption. In our case the accommodation is similar to a letting. (See Blasi [1998] STC 336). They say, the derogation is designed to allow for a reduced rate of VAT in the case of longer term hotel accommodation. It should not apply where different people occupy a room, each staying for less than four weeks, but cumulatively staying for more than four weeks. The derogation therefore requires that accommodation be provided to the individual who himself occupies a room for more than four weeks. It does not, require the person to whom the taxable supply of accommodation is made and the persons physically occupying the room to be one and the same.

In this case, the ACHA provides accommodation to individual refugee/asylum seekers who occupy the room for more than four weeks. It does not provide accommodation to a third party who block books rooms and allocates the rooms to their own clients (see Elga & Askar (1993) STC 628).

The Commissioners' Case

The Commissioners' contend that the Appellant's construction of Paragraph 9 Schedule 6 is wrong and there cannot be identified two separate and free standing transactions namely a supply of services and a provision of accommodation. A natural reading of paragraph 9(1) requires a single transaction, namely a supply of accommodation services. On this reading, it is a requirement of the paragraph that such a supply amounts to, or meets the description of, "the provision of accommodation" in sub-paragraph 9(a). The provision of accommodation is to be read only as a description of the supply of services, not as a separate transaction calling for separate analysis.

They say that the "provision of accommodation" are not special words nor a term of art and are synonymous with the supply of services in Section 31(1) VATA.

Paragraph 9 Schedule 6 only deals with a single transaction which is the taxable supply/provision of accommodation services. In this case, the recipient of that supply/provision was the RCB.

The Commissioners argue that the ordinary meaning of the words would suggest one supply not two. If the words are ambiguous, it is submitted that the construction advanced by the Commissioners should be preferred over that advanced by the Appellant. If there is an ambiguity, and only then, the Tribunal should seek to go outside the natural meaning of the word and one should look at the European provision, which the domestic provisions enacts. A derogation expressed as applying only to "hotel services provided to individuals themselves occupying the accommodation in question".

The derogation only anticipates the relief being available when the hotel accommodation is occupied by the individual who is also the recipient of the taxable supply of services.

The Commissioners argue that any derogation or exemption to the general rule has to be interpreted strictly and may not exceed what is expressly provided for. They refer to the following cases in support of this argument SUFA [1991] 2 CMLR 429; Wellcome Trust v CEC [2003] VATDR 572 (VTD 18417) and Monoprio v. CEC (VTD 17806).

The Law

1 Article 13B(b) Sixth Directive

The Sixth Directive exempts from VAT the leasing and letting of immovable property, although the provision of hotel accommodation is excluded. Article 13B(b) provides:

"Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and preventing any possible evasion, avoidance or abuse;

(b) the leasing or letting of immovable property excluding:

1. the provision of accommodation, as defined in the laws of the Member States, in the hotel sector or in sectors with a similar function, including the provision of accommodation in holiday camps or on sites developed for use as camping sites".

2 Section 31 and Item 1, Group 1 of Schedule 9 VATA

The above is implemented in domestic legislation by section 31 and Item 1, Group 1 of Schedule 9 to the Value Added Tax Act 1994 ("VATA"), which exempts:

"The grant of an interest in or right over land or of any licence to occupy land, or, in relation to land in Scotland, any personal right to call for or be granted any such interest or right, other than –

(d) the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation or of accommodation in rooms which are provided in conjunction with sleeping accommodation or for the purpose of a supply of catering".

3 Paragraph 9 Schedule 6 VATA

By way of derogation from the exclusion for hotel accommodation, paragraph 9 of Schedule 6 provides for a reduced rate of VAT where the supply of accommodation exceeds 4 weeks:

"(1) This paragraph applies where a supply of services consists in the provision of accommodation falling within paragraph (d) of Item 1 of Group 1 in Schedule 9 and –

(a) that provision is made to an individual for a period exceeding 4 weeks; and

(b) throughout that period the accommodation is provided for the use of the individual either alone or together with one or more other persons who occupy the accommodation with him otherwise than at their own expense (whether incurred directly or indirectly).

(2) Where this paragraph applies –

(a) the value of so much of the supply as is in excess of 4 weeks shall be taken to be reduced to such part thereof as is attributable to facilities other than the right to occupy the accommodation; and

(b) that parts shall be taken to be not less than 20 per cent".

Decision

.1 This Appeal is concerned with one main point – the tax treatment of supplies of accommodation made by the Appellant to BRC under the Agreement where the individual asylum seeker/refugee is provided with accommodation for a period exceeding four (4) weeks and whether the relief in paragraph 9 Schedule 6 VATA can be claimed in those circumstances.

.2 Under the Agreement between the Appellant and BRC dated 11 March 2004 the Appellant agrees to provide accommodation to asylum seekers/refugees referred by the BRC, provided accommodation is available to suit the referral made. NASS would fund the accommodation costs by making payments to BRC. In summary the arrangement between the parties works as follows:

(a) the BRC would refer individual asylum seekers/refugees to the Appellant;

(b) the Appellant would enter into a Licence Agreement with the individual concerned;

(c) the Appellant would issue to BRC invoices for each individual and the invoices would be based on the length of stay;

(d) the Appellant invoices BRC for its costs and therefore if the Appellant is repaid overcharged VAT, this would have to be repaid to BRC who would have been overcharged in their invoices; and

(e) the Appellant has the responsibility to remove the individual from the accommodation when the Licence has expired.

The key question is whether the derogation provisions apply in these circumstances.

.3 Let us first look at the legislative background. In looking at the provisions which underpin UK law it is necessary to look at the Sixth Directive which exempts from VAT the leasing and letting of immovable property but excludes from this exemption the provision of hotel accommodation Art 13 B(b) of the Directive provides:

"Without prejudice to other Community provisions, Member States shall exempt the following under conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions and preventing any possible evasion, avoidance or abuse:

(b) the leasing or letting of immovable property excluding:

1. the provision of accommodation, as defined in the laws of the Member States, in the hotel sector or in sectors with a similar function, including the provision of accommodation in holiday camps or on sites developed for use in camping sites."

.4 The provision of hotel accommodation is excluded from the exemption but Member States are given a margin of discretion in establishing criteria to distinguish between the provision of hotel accommodation and the leasing and letting of immovable property. This was recognised by the European Court of Justice in Case C – 346/95 Blasi v Finanzamt München [1998] STC 336 at 344:

"21. In defining the classes of provision of accommodation which are to be taxed by derogation from the exemption for the leasing and letting of immovable property in accordance with Art 13B(b)(1) of the Sixth Directive, the Member States enjoy a margin of discretion. That discretion is circumscribed by the purpose of the derogation, which, in regard to making dwelling accommodation available, is that the taxable provision of accommodation in the hotel sector or in sectors with a similar function must be distinguished from the exempted transactions of leasing and letting immovable property.

22. It is consequently a matter for the Member States, when transposing Art 13B(b)(1) of the Sixth Directive, to introduce those criteria which seem to them appropriate in order to draw that distinction.

23. Where accommodation in the hotel sector (as a taxable transaction) is distinguished from the letting of dwelling accommodation (as an exempted transaction) on the basis of its duration, that constitutes an appropriate criterion of distinction, since one of the ways in which hotel accommodation specifically differs from the letting of dwelling accommodation is duration of the stay. In general, a stay in a hotel tends to be rather short and that in a rented flat fairly long."

The underlying rationale is that the exemption from taxation shall not apply where the letting or leasing of property involves more "active exploration" of the property which is the case within longer stay lettings.

.5 Article 13B(b) of the Sixth Directive is implemented in the UK by Section 31 and Item 1, Group 1 of Schedule 9, VATA which exempts:

"the grant of an interest in or right over land or of any licence to occupy land, or, in relation to land in Scotland, and personal right to call for or be granted any such interest or right, other than –

(d) the provision in an hotel, inn, boarding house or similar establishment of sleeping accommodation or of accommodation in rooms which are provided in conjunction with sleeping accommodation or for the purpose of a supply of catering"

.6 A reduced rate of VAT is applicable, by way of derogation from the exclusion from exemption for hotel accommodation, under paragraph 9 of Schedule 6:

"(1) This paragraph applies where a supply of services consists in the provision of accommodation falling within paragraph (d) of Item 1 of Group 1 in Schedule 9 and

(a) that provision is made to an individual for a period exceeding 4 weeks; and

(b) throughout that period the accommodation is provided for the use of the individual either alone or together with one or more other persons who occupy the accommodation with him otherwise than at their own expense (whether incurred directly or indirectly).

(2) Where this paragraph applies –

(a) the value of so much of the supply as is in excess of 4 weeks shall be taken to be reduced to such part thereof as is attributable to facilities other than the right to occupy the accommodation; and

(b) that part shall be taken to be not less than 20 per cent"

Under the reduced rate provided by the derogation, approximately 20% of the invoice value is charged to VAT. In our case, HMRC while accepting that the Appellant provides accommodation refuses to apply the reduced rate allowed by the derogation and to repay the extra VAT charged. They do not agree that paragraph 9 Schedule 6 should be read as identifying two separate transactions, one a supply of services and the second, a provision of accommodation.

Given that legislative background, lets us now look at their application in this case.

.7 A supply is defined in Section 5 VATA as "all forms of supply but not anything done otherwise than for a consideration". It is a defined term but the definition used in the legislation is extremely wide.

.8 It is well established that the recipient of the supply is not necessarily the person who pays for the supply to be made. In our case, the Appellant finds accommodation for asylum seekers/refugees referred by the BRC. There is an agreement in place between the BRC and the Appellant, which states, inter alia, that the Appellant would be paid for the services, which they have provided. The Appellant is providing a service, accommodation placement services, which is provided to the BRC. The funds to pay for the actual accommodation comes from NASS but these are administered by the BRC. In these circumstances, we can say that the recipient of the supply of services is the BRC because they pay for the accommodation placement service. The supply of services consist of the provision of accommodation which is provided to the asylum seeker/refugee on an individual basis. The contract for the supply of accommodation placement is between the Appellant and the BRC but the actual accommodation is provided to a third party asylum seeker/refugee who is not party to that contract. They benefit from the accommodation placement services by having accommodation provided to them. The only contractual relationship which the asylum seeker/refugee has is with the Appellant through the licence, which is not a supply of services.

.9 Let us look at how the relationship works between the Appellant and the BRC. The Appellant has various properties, which they lease and manage. The BRC require accommodation for their clients. They will be contacted by the asylum seeker/refugee to assist in finding emergency accommodation. The BRC has no accommodation of its own, but offers a placement service to those persons. They would contact the Appellant and ask if there was available accommodation at any of their properties. The BRC would have no right to a room. If a room was available the BRC would complete a form which refers the individual to the Appellant. The individual will take this referral form to the Appellant together with another form giving personal details and their accommodation needs. The forms would serve to introduce the person seeking accommodation to the Appellant who would conduct an interview with the individual, which would include a discussion of their needs and an explanation of the type of accommodation available and the terms and conditions for its use. A simple licence agreement is signed by the Appellant and the asylum seeker/refugee. The cost and type of accommodation together with the relevant dates would be given in the simple licence agreement, which is about one page long. Mr Erskine Odongo, Chief Executive of the ACHA, gave evidence that a licensee would not pay for the accommodation but funds to do so would be provided by NASS directly or indirectly through the ACHA. Under the terms of the partnership agreement, the BRC has to pay the Appellant for the cost of providing the accommodation to the individual. The Appellant would invoice BRC monthly. Invoices would have details of the person to whom the accommodation has been provided, the place of the accommodation, the rate and the duration of the stay. Since the asylum seeker/refugee would not have the funds to pay for the emergency accommodation, which by its nature is provided in emergency circumstances, it would stand to reason that the accommodation costs would paid by another party. Once the asylum seeker/refugees' application has been processed by the Home Office, they are no longer eligible to have the accommodation costs paid and the BRC would no longer be responsible for meeting the costs of the funding. Notice would then be given to the individual that the accommodation funding would be terminated. The Appellant is then responsible for obtaining vacant possession of the accommodation pursuant to the licence agreement. It would serve a notice to quit or institute eviction proceedings against the individual as necessary.

.10 If one looked at the contractual arrangements, it would be clear that a supply of services is being made by the Appellant to the BRC but the actual subject matter of the services, (i.e. accommodation) is provided to a third party who is not a party to the contract between the Appellant and the BRC. There is in effect a tripartite relationship between the parties. The Appellant contracts with the BRC who would both pay for the accommodation and provide a person who is seeking accommodation. BRC are sent invoices which detail the accommodation services which have been provided to the beneficiary of the supply, the asylum seeker/refugee, who may have accommodation for a period of more than 4 weeks in some cases.

The nature of the tripartite relationship is illustrated in the WHA case. Mr Justice Neuberger, with whom the other judges agreed, explained the relationship when he said:

"34. The question in the present case, therefore, is whether by carrying out work to a vehicle pursuant to a policy, a garage is supplying services to WHA, as WHA contend. In this connection, the Commissioners' argument is that the services are supplied to the policyholder because the works are carried out by the garage to his vehicle, and any parts involved in the works are installed by the garage into his vehicle.

37. In these circumstances, it appears to me that, unless there is some reason for reaching a contrary conclusion, there is indeed a "supply of services" by the garage to WHA when the garage carries out repair work to a vehicle under a policy. Given the very wide definition of "services" in Section 5(2)(b), it is hard to resist the conclusion that, if something is supplied to WHA, it can be described as "services": WHA receives a benefit from the carrying out of repairs (namely satisfaction of an obligation to Viscount and the ability to earn the £17.60) and it is work which WHA will have authorised to be done. The fact that there is another beneficiary of the work, who may even fairly be said to be the primary beneficiary, namely the owner of the vehicle, should not, at least of itself, prevent the arrangement operating as a supply of "services" to WHA.

38. It further appears to me that the services in question are 'supplied' to WHA . Again, the fact that they are also being provided to the vehicle owner does not, to my mind, prevent them from being treated as "supplied" to WHA.

40. Even assuming that Mr Peacock is correct in his contention that there cannot have been a "supply of services" both to the owner and to WHA, it appears to me that the proper analysis in the present case is that the services were "supplied" to WHA albeit that they were also provided to the owner."

In a tripartite relationship, A may contract with B to provide a service to C.

.11 In looking at the tripartite relationship, the derogation in paragraph 9 Schedule 6 does not require the supply to be made to the individual asylum seeker/refugee who benefits from the accommodation provided. It is only required that the supply take the form of a provision of accommodation to an individual who occupies it for four weeks or more.

.12 If one looks at the Sixth Directive, there is a clear exclusion from the exemption for hotel accommodation. The provision of hotel accommodation is standard rated. However, Member States have a discretion in defining the provision of accommodation, which is to be taxed. The state is given power to define the relevant criteria to distinguish between the taxable provisions of hotel accommodation and the exempted transactions of leasing and letting of immovable property. These are distinguished on the length of stay. The derogation provides for VAT to be payable where the accommodation is not transitory as typical of hotel accommodation but longer term and so similar to a letting. The period of 4 weeks demarcates short and longer term provisions of accommodation. This distinction was made in the case of Elga and Askar Co Limited and Another v Customs and Excise Commissioners [1983] STC 628 at 631, in relation to the predecessor to paragraph 9 of Schedule 6 VATA where it was stated:

"The 1972 Act provided that a person who pays for a stay in a hotel, must pay value added tax. There is an exception for a resident, a person who stays for longer than four weeks because he is more like a tenant, and the grant of a tenancy is not the supply of a service."

The derogation requires the individual occupying the accommodation to stay for 4 weeks or more but does not require the payment for the room be by the same party who occupies it and to this extent allows payment to be made by a third party. This is borne out by the HMRC internal guideline (C & E Manual, Volume V1-12 Value Added Tax, Section 5.22) which states:

"The payment for the supply may be made wholly or partly by a company or other body. The most common situation you are likely to encounter is that of a local authority paying for homeless persons 'accommodation'. However, as long as the supply of the accommodation is made to the individual occupying the room and the occupation exceeds a period of 4 weeks, the reduced value rate will still apply. If the supply is made directly to a Local Authority who then places the individual in the accommodation, the reduced value rate will not apply."

.13 HMRC says that paragraph 9(1) Schedule 6 refers to only a single transaction, namely the supply of accommodation which is synonymous with the supply of services and the construction given to paragraph 9 Schedule 6 by the Appellant is wrong. They contend that there is a single transaction which is the taxable supply of accommodation and the recipient of that supply is the BRC. The derogation only allows the relief to be available where the hotel accommodation is occupied by the individual who is the recipient of the taxable supply of services. They say that the derogation provisions must be construed strictly if there is any ambiguity. Further, on a natural meaning the provision of accommodation has to be read as a description of the supply of services in question and not as a separate transaction requiring separate analysis. These are fair points and it is possible to read the legislation in that way through it is not an interpretation with which I agree. There is nothing in the legislation, which precludes a tripartite relationship where one party pays, and another benefits from the accommodation services, which are provided. It is accepted by all parties that no supply was made to the asylum seeker/refugee since no consideration was given by that party and the grant of a tenancy is not a supply of services. We are more persuaded by the view that the supply of services and the provision of accommodation can be separated from each other in interpreting the legislation.

The rationale for the legislation is to tax the more active exploitation of immovable property. The UK has laid down criteria for the derogation from the exemption and one such criteria is that the accommodation must be occupied by an individual for more than four weeks. This is because such an occupation is more akin to a tenancy. On a natural reading of the legislation there is no ambiguity, there is a supply to one party but the service is received or provided to another party on an individual basis. The supply was made to the BRC and it consisted of a supply of accommodation services, but the actual accommodation was provided to the individual asylum seeker/refugee. There is no requirement in the legislation that the person who receives the taxable supply of accommodation and the person physically occupying the room be the same person. We believe this is the correct approach to be taken.

For the reasons given, this Appeal is accordingly allowed and reasonable costs to be awarded to the Appellant. If matters of costs cannot be agreed an application may be made to the Tribunal for directions.

DR KAMEEL KHAN

CHAIRMAN

RELEASED: 9 February 2006

LON/05/382