VAT – Public houses – Option to tax – Appellants owning large number of public houses and letting them to tenants – Pubs containing residential accommodation in which tenants residing – Option to tax exercised in respect of lettings – Whether appellants entitled to exercise option to tax in respect of entire premises – Whether option excluded in respect of any part of rent on ground that such rent attributable to residential accommodation – Appeal dismissed
The appellant companies owned a large number of public houses, which they operated on a tenanted basis by granting a lease to a tenant who agreed to pay rent and to buy certain products from the appellants. Many of the properties contained residential accommodation, which was generally occupied by the tenants and their families. The appellants exercised the option to tax in respect of the lettings of those properties, under Schedule 10 to the Value Added Tax Act 1994, thereby electing to waive the exemption from VAT in respect of lettings of immovable property. That election had a bearing on the appellants’ ability to recover input tax since it enabled them to recover VAT on their property-related and overhead costs.
Until 2008, the appellants proceeded on the assumption that 10% of the rent that they received related to the residential accommodation, in respect of which the option to tax was precluded by para 2(2)(a) of Schedule 10 or, under the version in force after the end of May 2008, para 5(1). On that approach, the rent was apportioned under Note 10 to Group 5 of Schedule 8 so that the rent attributable to the residential areas was excluded from the option to tax. That 90:10 split between commercial and residential was standard practice in the brewing sector and was reflected in the invoices that the appellants issued to tenants.
In 2008, the appellants challenged the correctness of that apportionment, asserting that the rent was derived exclusively from the commercial parts of the properties and that the option to tax therefore applied to the entire premises. It contended that the rent was based solely on the profit that the pubs could generate and that the residential accommodation was provided free of charge. The respondents continued to adhere to the view that the rent should be apportioned since part related to the residential accommodation. The First Tier Tribunal (FTT) upheld the view of the respondents and the appellants appealed.
Decision: The appeal was dismissed.
The value of the supply for VAT purposes was calculated by reference to the consideration for which it was made. Consideration was a subjective value in so far as it highlighted the value that the parties themselves had placed on the goods or services in question.
The fact that, under the relevant contracts, tenants would pay a single amount of rent for the whole of the premises did not inevitably mean that the rent was to be attributed to every part of the premises. However, where a tenancy extended to both residential and commercial accommodation, the rent could ordinarily be expected to relate to the residential areas as well as the commercial ones. This was not a case in which the residential areas were inherently valueless. The fact that tenants were required to occupy the residential accommodation by the terms of the contract did not negate its value since the tenants would still be relieved of the need to obtain alternative accommodation.
Since the contracts between the parties did not automatically determine the issue of whether rent was attributable to residential areas, it was relevant to consider what both sides were likely to have intended. The tribunal had properly observed that the appellants’ profits-based method of valuing the rents was several steps removed from the actual agreement reached between the appellants and their tenants and that it represented an opening position that had been refined and developed in the course of negotiations. Moreover, even if rent were fixed by reference to profitability, that did not necessarily mean that the value of residential accommodation was ignored. A prospective tenant, when considering what share of anticipated profits he would be willing to pay in rent, could be expected to take into account the fact that he would receive living accommodation and that factor could have a bearing on rents. The tribunal had also been entitled to attach weight to the invoices issued to the tenants so far as these apportioned rent between the commercial and residential areas on a 90:10 basis. Its conclusion that rent was attributable to the residential parts was not unreasonable or unfounded on the evidence.
Andrew Hitchmough and Jonathan Bremner (instructed by Ernst & Young LLP) appeared for the appellants; Raymond Hill (instructed by the legal department of HMRC) appeared for the respondents.
Sally Dobson, barrister
