VAT is a major issue for the SA sector, with many small operators trading in a very tight market. But could SA operators who operate from leased properties save VAT if their business falls within the TOMS?
The VAT issues involved are complex and you need to know how the TOMS works to understand whether or not it can apply to SA, as I’ve discussed below. Unfortunately, HMRC’s guidance about the TOMS is confusing and doesn’t provide the certainty that businesses need to avoid making mistakes. More on this point later.
How does the TOMS work?
The TOMS was introduced to reduce VAT administration for holiday companies, or tour operators within the European Union. HMRC’s guidance about the scheme is in VAT Notice 709/5: Tour Operators Margin Scheme http://tinyurl.com/yc9az8wq.
Serviced accommodation is liable to VAT, like hotel accommodation
Under normal VAT rules, every business who sells holidays to retail customers would have to register for VAT in each country where holidays are based. The administration of such registrations would add a significant administrative burden for both the business owners and the tax authorities in the countries concerned, with no real benefit in VAT revenue.
VAT registration and the margin scheme
The TOMS allows these businesses to register for VAT in the country in which they are based and account for VAT under the margin scheme on the sale of “margin scheme supplies”. The tour operators can’t claim any VAT on the costs of the scheme supplies, but only pay VAT on the profit margin to the tax authority in the country in which they are VAT registered.
For example, if you buy say 50 rooms of hotel accommodation for a season in a Spanish hotel, then sell those individual rooms to retail customers, you can’t claim the Spanish VAT. However you only pay UK VAT on the profit margin. TOMS applies primarily to accommodation and travel, but can include other services such as trips and services of tour guides.
One crucial point about the TOMS is that, in the UK, the VAT registration limit (currently £85k) only applies to the TOMS margin, not the total income. This means that (assuming your only business activity is SA) you could turnover say £1m each year, but you don’t have to register for VAT if your TOMS margin is below £85k. For many SA operators, this is a crucial aspect of the scheme and can mean the difference between operating at a profit or loss.
In order to fall within the TOMS, the services sold by to the final customer; i.e. the consumer or retail customer; must not be “materially altered”. So a tour operator may block book a number of hotel rooms to provide holiday accommodation for a season in Spain. The onward sale of that accommodation to retail customers falls within the scheme because the services have not been “materially altered”. The operator has purchased hotel accommodation, albeit as a block booking, and sells the accommodation to individual retail customers.
What is “materially altered”?
There is no legal definition of the term “materially altered”, but a good analogy in the context of hotel accommodation would be that of an hotel owner who sells hotel accommodation. The hotel owner owns the property, furnishes the rooms and public areas of the hotel, employs staff and runs the business. Such supplies are called “in-house” supplies and are liable to VAT under the normal VAT accounting rules.
While there isn’t any definition of “materially altered” in Notice 709/5, section 7 of the notice explains what is regarded as “in-house” supplies of accommodation. It discusses several different types of travel accommodation, including hotels, camping and cruises. Section 7.6 opens with the following statement:
“If you own a hotel and supply accommodation within it, you are making an in-house supply of accommodation.”
The position on hotel accommodation seems to be quite clear.
But unfortunately it’s a bit more complicated….
Section 7.3 discusses when cruises are in-house or as TOMS supplies. The section makes a similar comment about cruises:
“You can make in-house supplies of cruises if you, or a member of your VAT group, own the vessel on which the cruise is supplied”.
So the sale of cruises is the same as the sale of hotel accommodation; i.e. in-house when the business owns the ship. The next paragraph discusses if the TOMS applies, based on whether the ship is chartered by the cruise operator, rather than owned. The paragraph contains around 100 words, punctuated by a couple of commas. Frankly, I can’t make head nor tail of it!
The paragraph seems to say that if a cruise operator charters a ship for at least 2 years, and has exclusive use of the ship during this time, then the operator’s sale are “in-house” and therefore subject to normal VAT rules.
When do cruises fall within the TOMS?
So does this mean that if the ship is chartered for less than 2 years, and/or the operator does not have exclusive use of the ship during that period, then the supplies fall within the TOMS? And what’s behind the 2 year “rule”? I’m no expert when it comes to ships and cruises (other than wishing I was somewhere warm and sunny as I write this blog…..), but I can only assume that this particular paragraph has been the victim of a complete lack of proof-reading!
However the reason for mentioning this part of Notice 709/5 is to demonstrate that the TOMS is a confusing subject and HMRC’s guidance (or lack of!) makes things even more complicated.
TOMS and serviced accommodation
In recent years, we’ve seen the rapid growth of the serviced accommodation (“SA”) business, with AirBnB and other companies selling accommodation in houses and apartments rather than hotels. For VAT purposes, SA is regarded in the same way as hotel accommodation. The sale of SA is liable to VAT at 20%.
However, there has been a lot of discussion within the SA sector about the application of the TOMS, where the SA operator leases properties. And HMRC’s guidance in section 7.6 of Notice 709/5 simply adds to the confusion.
The second paragraph in VAT Notice 709/5: Tour Operators Margin Scheme, paragraph 7.6 reads as follows:
“…..If you hire, lease or rent accommodation under an agreement whereby you take responsibility for the upkeep of the property and you are required to undertake any maintenance to the fabric of the building (that is, not just cleaning and changing towels or bed linen and so on), you are making an in-house supply of accommodation….”
In practice, this type of arrangement often falls within what are sometimes referred to as “landlord’s repairing leases”. I’ve seen a number of leases that seem to fall within the guidelines in this paragraph. HMRC has even agreed that some SA operators with such lease arrangements meet the TOMS criteria, in some cases meaning that the operators don’t even have to register for VAT.
Unfortunately, the lease is not the only factor that determines whether or not the supply falls within the TOMS. You have to determine whether the underlying nature of the “supply” of accommodation falls within the broader application of the term “materially altered”.
HMRC has recently ruled that the TOMS does NOT apply to other SA operators with similar lease arrangements, because they believe that the sale of SA accommodation from a leased property has been “materially altered”.
So what is the correct position? Unfortunately I don’t know, but either way, I suspect that ultimately, HMRC’s position is unlikely to favour the SA operators.
But my main concern is the fact that SA businesses operating with similar leases have received different rulings from HMRC. This means that some operators are paying VAT on their income, while others are not even registered for VAT.
It is time for HMRC to address this anomaly and issue proper guidance, so that all SA operators apply the same VAT treatment to their businesses. It’s not fair that businesses carrying out the same activity end up with completely opposite VAT liabilties.
At this point, I have to advise SA operators to act cautiously. You are in exactly the same position as any other small business owner. If your turnover exceeds the VAT registration limit, then you have to register for VAT and pay VAT on your sales.
But in the longer term, let’s hope that HMRC clarifies their position so that SA operators are trading on a level playing field.
Marie
June, 2019