VAT and supplies of fractional shares in apartments

The grant of fractional interests entitling holders to annual short term stays in a building comparable with a hotel was excluded from exemption either because it was not a supply of land or as the provision of sleeping accommodation in a hotel or similar establishment.

The Court of Appeal has held that grants of fractional interests giving rights to annual short term stays in a property providing luxury serviced accommodation were excluded from the VAT exemption for supplies of land: HMRC v Fortyseven Park Street Ltd [2019] EWCA Civ 849. In overturning the decision of the Upper Tribunal, the Court of Appeal considered that the overall nature of the supply of the interests to buyers under a Membership Agreement and the accompanying rights and obligations under that agreement was sufficient to distinguish the situation from the usually passive activity of leasing or letting immovable property. As such, either the supply did not fall within the concept of “letting or leasing of immovable property” or, in the alternative, the supply fell within the exception for the provision of accommodation in a hotel "or similar establishment".

Background

Fortyseven Park Street (FPS) owned the lease on a property on Park Street in Mayfair, containing 49 self-contained apartments. It sold “fractional interests” in these apartments to individuals (called Members) which were governed by a Membership Agreement.

The Membership Agreement (which lasted until 2050) provided Members with the right to stay in an apartment for 21 nights per year, subject to making an advance reservation, though their right did not attach to any particular apartment. Members paid an “annual residence fee” to a manager (a company related to the taxpayer) in return for the management and administration of the property and the rights and obligations under the membership agreement.

Members were also entitled to various benefits including receiving rent from the apartments as an alternative to staying in the property, the option (subject to availability) to purchase extra nights, access to a resale programme and an exchange programme whereby members could exchange a stay of one week or more for a stay of an equivalent length of time in a different property or in a Marriott Hotel.

FPS contended that the sale of the fractional interests qualified as an exempt grant of an interest in land. HMRC disagreed, arguing that either the supply was not a supply of land or otherwise that it was excluded by VATA 1994 Schedule 9 Group 1 item 1(d) (the provision of accommodation in a hotel or similar establishment). The First Tier Tribunal held that, whilst the supplies would in principle have fallen within the exemption for land, it agreed with HMRC that the supplies were excluded by the exception for hotel accommodation. The Upper Tribunal reversed that decision, considering that the FTT had been wrong to focus on the fact that each stay was for a relatively short period. The supply in this case was not simply a series of individual short stays, it was the supply of a long-term right to occupy a reserved apartment during agreed periods.

Supply of land?

The first issue was whether the rights obtained by the Members were such as to entitle them to occupy the property as if they were an owner. HMRC argued (as it did in the lower courts) that the fact that the rights of occupation in this case were subject to the making of an advance reservation removed the supply to Members from the land exemption. The Court of Appeal rejected this argument. Even though a Member was required to make a reservation, Members were still buying a right to occupy conditional on reservation. Whilst Members did not receive in advance the right to occupy any particular apartment, it was clear from the ECJ decision in Temco that such an exclusive right was not necessary. The economic reality was that a Member obtained a sufficient right to occupy from the outset.

However, HMRC also suggested that a supply of land is normally characterised by a relatively passive activity linked to the passage of time and with little significant added value. Where there is a supply of a more complicated service, involving provision of additional facilities, it is likely to take the supply outside the exemption for land. In this case, HMRC argued that the various elements of the Membership Agreement which promised the supply of hotel-type services took the supply outside the scope of a simple supply of land.

FPS countered that many of the additional hotel-type services were provided by the manager and not by FPS itself. The Court of Appeal did “not find this an easy point”. On balance, however, the Court considered that FPS was obliged to provide those additional services to the Members and that FPS, therefore, supplied those hotel-type services which were provided by the Manager. There was no contract between the Manager and the Members, the only contracts being between FPS and Members and between FPS and Manager. FPS had undertaken to procure the Manager’s services and had contractual responsibility for their performance.

The Court of Appeal then reviewed the case law of the ECJ on supplies of the “letting or leasing of immovable property”. In particular, the Court considered the case of Luc Varenne (Case C-55/14) as an illustration of how a transaction involving the letting of property can be taken out of the land exemption by the provision of other services. In that case, the supply of a football stadium together with various other services such as maintenance, cleaning, repair etc was held to fall outside a pure land transaction. The supply of a “more complicated” service by the landowners consisting of the provision of access to sporting facilities was involved. In particular, the land owner was permanently present at the facilities performing a role which was “more active” that that which would arise from the letting of immovable property.

The Court considered that this was a similar case. Members did not pay such large sums to “obtain bare physical space”. They were promised the “amenities and service of a five-star hotel” and the Membership Agreement reflected this. The Court considered that these hotel-type additional services could not simply be regarded as ancillary or “plainly accessory” to a supply of land. Accordingly, the supplies of fractional interests by FPS did not fall within the land exemption, which (the Court noted) should be restrictively construed.

The hotel sector issue

Although strictly unnecessary to do so, the Court went on to consider whether the exception for “the provision in a hotel or similar establishment of sleeping accommodation" would have applied had the supply been a supply of land. The Upper Tribunal had noted that the setting of the accommodation was comparable with a small boutique hotel with many services associated with high-class hotel accommodation. Nevertheless, the Upper Tribunal considered that the FTT had erred in focussing on the fact that each stay was for a relatively short period each year in reaching its conclusion. The supply in this case was not simply a series of individual short stays, it was the supply of a long-term right to occupy a reserved apartment during agreed periods and that was not simply the provision of sleeping accommodation in a hotel or similar establishment.

The Court of Appeal, however, concluded that the Upper Tribunal should not have interfered with the decision of the FTT on this point. There was a supply that included “sleeping accommodation” in a “similar establishment” to a hotel. There was no reason why the FTT should not have had regard to the length and characteristics of individual stays. The focus of the Upper Tribunal on the “long term right” did not exclude the application of the exception. There was nothing in the jurisprudence of the ECJ to suggest that a supply is taken outside the exception just because it has a long-term nature.

In addition, the Court noted that the exception to the exemption (unlike the exemption itself) should not be construed narrowly.

Comment

The nature of the supply of a timeshare of apartments in a building run in a similar way to a hotel may well, in practice, be fact specific. Whilst this decision suggests that such supplies may fall outside the exemption from VAT, other developers would need to consider the particular facts of each case. There may well be a fine balance between those elements of the supply that point towards similarity to the hotel sector (short term, serviced lets) and those that pointed to something more (an enduring right).

More generally, it is also worth noting that the all of the Courts held that the fact that a right to occupy may be subject to conditions (such as the need to make a reservation) does not prevent the grant of that right from falling within the exemption for a supply of land.

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