In this article, we consider a recent case highlighting the approach of HMRC to charities, the challenges faced when dealing with HMRC and the duration of disputes.
HMRC lose hostel accommodation case
The facts and decision
HMRC recently lost a case against City YMCA London relating to the VAT treatment of the provision of temporary hostel accommodation to homeless people. The VAT treatment was agreed with HMRC in 2010. In 2017, an inspecting officer took the view the activity was VAT exempt as a supply of welfare services. HMRC reconsidered that ruling and issued a revised decision that the supply was subject to VAT as a supply of facilities with no exclusive right to occupancy.
City YMCA argued there was a supply of accommodation similar to hotels, inns and boarding houses. This is subject to VAT. However, the advantage of this treatment is that a reduced VAT rate applies to hotel stays exceeding 28 days This resulted in an effective VAT rate of 4%, whilst still allowing for full deduction of VAT on costs. City YMCA would also lose the benefit of the 5% reduced rate applied during Covid. HMRC raised an assessment on City YMCA, which led to the appeal.
The courts agreed with City YMCA that the supply was a licence to occupy as the tenants had (among other things) a lockable room. The tribunal also considered that the supply was similar to hotels and comparable providers. HMRC’s focus on the selection method, on how marketing differed from the way hotels sell accommodation and on how homeless tenants were selected for accommodation could not be determinative. Essentially, the courts found that City YMCA were providing temporary accommodation.
Despite the fact that HMRC had previously agreed the treatment; the visiting officer took a different view and then the reviewing officer another view. This case highlights the lack of ability to rely on decisions made by HMRC – something severely restricted in recent years.
The options to challenge HMRC’s position are normally to request a reconsideration, then possibly move to alternative dispute resolution (involving a mediator), but this can only be done if an appeal is lodged; and then to a tribunal hearing if that process is unsuccessful. It is important to note alternative dispute resolution will not result in a divergence from a decision by HMRC policy, which appears to be the case in respect of City YMCA.
In respect of timescales, if you consider this particular case, the issue arose in 2017 and the decision following litigation released in 2022. That is a number of years with uncertainty for a charity providing a valuable social contribution.
Make a change for the better
It would be refreshing if HMRC could take a step back to consider what is being provided and the critical social importance of the activity. VAT law has reliefs in the public interest, and these are eroded by narrow interpretation. This is further frustrated by duration and cost to challenge a decision by HMRC and get to the right answer.
The charity and not for profit sector is critical to society and yet there are limited and restrictive reliefs available. Given the current economic and social issues, and with the next general election potentially being brought forward, this might be the time to consider lobbying to secure some wider reliefs akin to those allowed by government departments and local authorities who enjoy beneficial VAT recovery mechanisms.
Want to know more?
In our 2022/23 Charity and NFP Outlook, VAT partner, Sean Glancy, provides more of his views on the ruling and also explains the implementation of a new penalty regime, which expands the likelihood of receiving a penalty. Click on the link below and turn to page 11 to read more.