Category Archives: Licences to Occupy

VAT: the supply of student accommodation was exempt and not standard rated

The First-tier Tribunal (Tax) case of The Principal & Fellows of Lady Margaret Hall v Revenue & Customs [2014] related to the VAT treatment of supplies of term-time accommodation made to students of Lady Margaret Hall, Oxford University (“the College”) and whether those supplies were standard rated, as the College’s Principal & Fellows (the appellant) argued, or exempt as HMRC argued.

The appellant had a subsidiary, LMH Hospitality Services Limited (“LMHHS”) and entered into an agreement with LMHHS whereby LMHHS was to supply accommodation to College students.

How might this help the College?

The College will have a much reduced capacity to recover input VAT on costs as it makes mainly VAT exempt supplies.

The introduction to it’s supply chain of a “subsidiary” capable of, and tasked with, making taxable supplies to the students would facilitate the recovery of input VAT. Costs bearing VAT could be channeled to be incurred by that subsidiary.

But would anything like that work here?

The case is important as other educational institutions have tried this, and variants of the principle. The recent case of HMRC -v- University of Huddersfield [2014] (q.v.) being a case in point.

The issues were:

1. Who supplied the accommodation to the students? Was it LMHHS as the appellant argued or the College as HMRC argued?

2. If (as the appellant had contended) LMHHS made the supply to the students, was it exempt under Schedule 9 Group 1 Schedule 1 of the Value Added Tax Act 1994 (“VATA”) as a licence to occupy land?

Under s31(1) VATA a supply of services is an exempt supply if is of a description specified in Schedule 9 including:

2.1 Schedule 9 Group 1

d) “The grant of any interest in or right over land or of any licence to occupy land….” and

2.2 Schedule 9 Group 6

Item 1

“1. The provision by an eligible body of:

(a) education …

4. The supply of any goods or services (other than examination services) which are closely related to a supply of a description falling within item 1 (the principal supply) by or to the eligible body making the principal supply provided —

(a) the goods or services are for the direct use of the pupil, student or trainee (as the case may be) receiving the principal supply; and

(b) where the supply is to the eligible body making the principal supply, it is made by another eligible body.”

The appellant said that a supply by LMHHS could not be exempt under the education exemption (Schedule 9 Group 6 VATA 1994) because LMHHS was not “an eligible body” even if the College was.

Schedule 9 Group 1, Item 1 provides an exception to the VAT exemption at Schedule 9 Group 1 (see 2.1 above) for:

“(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;”

A Note 9 to the Schedule provides:

“Similar establishment” includes premises in which there is provided furnished sleeping accommodation, whether with or without the provision of board or facilities for the provision of food, which are used by or held out as being suitable for use by visitors, or travellers.”

If the supply was prima facie exempt within Schedule 9 Group 1, was the appellant correct to say it was nevertheless standard rated because it fell out of exemption under the exception in Item 1(d) of the Schedule covering the provision of accommodation which is provided in an establishment similar to a hotel?

The Tribunal said “no”. Access to academia and library facilities were not found in hotels or similar establishments. Hotels do not have shared eating arrangements but allow guests to be seated at separate tables.

The students were not “visitors” paying visits to the College from home. It cannot necessarily be assumed that students will return to where they came from. They may have left home. Students needed advance permission for parties. Visitors do not normally throw parties for others at the place they are visiting. During term time the College was their home.

3. If the supply was to be taxable under the exception to the exemption at 2.1 above was it necessary for the students to have exclusive possession to fall within Schedule 1 Group 9?

The appellant argued it was not.

The Tribunal disagreed. It was necessary. But the concept of exclusive possession in European case law might differ from “exclusive possession” as English law considered to be a fundamental characteristic of leases. What was fundamental was the ability to exclude others from occupying “as owner”.

Only the student could occupy a room that was subject to the agreement. Though not explicitly, the agreement effectively conferred on the student “the right to occupy property as if that person were the owner and to exclude any other person from enjoyment of such a right”.

4. If exclusive possession was necessary HMRC said LMHHS was not able to grant this to the students because LMHHS had not itself been granted the necessary and adequate land interest under the agreement between the College and LMHHS.

The Tribunal agreed with the appellant that what LMHHS had been granted by the College made no difference. What counted was the nature of the agreement between LMHSS and the students. If that agreement said that the students would get exclusive possession that was an agreement capable of falling within the land exemption (Schedule 9 Group 1) whether or not LMHSS had the necessary legal status to deliver that benefit.

5. If the answer to issue 1. was that the College made the supply, was the supply exempt because it is a supply by an eligible body of something which is “closely related” to the supply of education?

Fatally to the appellant’s overall case, the Tribunal agreed with HMRC that:

– the College supplied the accommodation to the students with LMHHS merely acting as the College’s agent.

The College:

– advertised the rooms;
– received payment;
– through it’s own staff dealt with accommodation issues and complaints;
– effectively created the demand for the supply of accommodation to the College’s students. Under College regulations students were required to get permission if they wanted to live away from College (the “residency requirement”);
– set the terms of the accommodation agreement; and
– effectively controlled the price of the accommodation.

There was no evidence of LMHHS marketing or promoting in respect of a supply being offered by LMHHS as might be expected if LMHHS was the principal.

Applying also the “economic reality test” the factors were more consistent with the College being the person who, in economic reality, made the supply to the students and pointed away from the economic reality being that LMHHS made that supply; and

– that the supply of student accommodation by the College in term-time was “closely-related” to the College supplying education to the students. The residency requirement imposed by the College was a factor strongly indicating this.

In conclusion the supply of student accommodation was by the College and was VAT exempt and not standard rated.

This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.