A recent First-Tier Tribunal (FTT) decision in the taxpayer’s favour has helped clarify that room rental is VAT exempt, but the standard rating can apply if additional services are also supplied, such as a hairdresser renting chair spaces.

The FTT case involved hair and beauty business, Errol Willy Salons, hiring out two spare rooms to self-employed beauticians. Exempt VAT treatment suited the beauticians who were not VAT-registered.

HMRC argument

HMRC contended that a standard-rated package of services was being provided rather than just the two rooms. Along with the use of rooms, the self-employed beauticians had access to the staff toilets and rest area, occasional use of the services of a receptionist, and were provided with light and heat. They also benefited from advertising.

HMRC argued the facts were similar to the Byrom case – which had gone in their favour – where rooms hired to self-employed masseuses came with a bundle of other services including access to a kitchen, showers, a washing machine, linen and towels, security, and a reception.

A victory for HMRC could have impacted any business letting out a spare room. However, although HMRC’s ambition to narrow the VAT room rental exemption has been checked, they may now resort to legislative change.

The decision

The FTT disagreed that the Byrom case was comparable because the beauticians in the Errol Willy Salons case were only provided with what were essentially bare rooms. The masseuses in the Byrom case, in contrast, had the use of a package of services, one of which was the provision of a room.

  • Although the additional services provided to the beauticians made it easier for them to provide their services, crucially none of the services were considered to be essential.
  • The additional services were therefore incidental to the supply of the room.
  • The predominant supply made by the taxpayer was room rental, and this was correctly treated as VAT exempt.

More detail on the Byrom case, along with HMRC’s view on the VAT treatment of supplies containing several elements (including the right to occupy the property), can be found here.

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