The unexpected VAT implications of UK modern living concepts

The living sector continues to attract considerable investment, with private rentals and student housing identified in particular as asset classes with the greatest potential for growth over the next 12 months. 

Amid significant investment in these sectors and a shift away from buy-to-let landlords with small portfolios, we are witnessing an increasing number of large, purpose-built or re-purposed developments, especially in key city centre locations across the UK. 

As we see an increase in new and innovative offerings used to attract occupants, and operators looking to distinguish themselves in a growing market, providers of residential accommodation should be mindful of the potential pitfalls. Particularly those considering the co-living model should note the difference in VAT treatment between conventional residential letting, which is exempt from VAT, and serviced accommodation, which is standard rated. This awareness is crucial in order to avoid an unexpected additional VAT cost.

The rise of co-living models

Co-living is an emerging concept that offers city centre living for younger generations, blending private spaces with extensive common areas to foster a sense of community and social interaction. Typical co-living schemes offer all-inclusive billing, comprising fully furnished studio bedroom units or cluster bedrooms, with significant communal amenity spaces such as gyms, residents’ lounges, cinema rooms and co-working spaces.

In addition to substantial amenity offerings, build-to-rent (BTR) schemes, and co-living in particular, often offer shorter minimum tenancy terms, flexibility in moving between apartments and low or no deposits. There is also an increasing demand for additional services such as cleaning, concierge, and events programmes, particularly among new graduates and young professionals who have become accustomed to the high-quality and extensive offering of the Purpose-Built Student Accommodation (PBSA) market.

As an attractive market for investors and developers, it is safe to say that we will see many more of these sorts of schemes over the coming years. A recent paper found that institutional investment in residential schemes now accounts for 23% of assets under management, having jumped from the smallest to the largest sector across funds over the last decade. 

The fine line between exempt residential letting and standard-rated serviced accommodation 

Recent VAT case law highlights the grey area between exempt traditional residential letting (residential lets on six-month Assured Shorthold Tenancies (ASTs), for example) and the provision of serviced accommodation in an establishment “similar to a hotel”, which is subject to VAT at the standard rate.

A “similar establishment” includes premises that provide furnished sleeping accommodation, with or without the provision of board or facilities for the preparation of food, which are used by or held out as being suitable for use by visitors or travellers.

In the case of Realreed Ltd v Revenue & Customs, the taxpayer unsuccessfully appealed an HMRC assessment for under-declared VAT of over £4m in relation to its supplies of short-term accommodation in its apartment building. The Tribunal held that the premises were considered a “similar establishment” for VAT purposes due to:

• The fact that the apartments were used by people staying for relatively short periods and the accommodation was advertised to travellers and visitors.
• The offer of additional services (such as daily maid services and linen changes), even though these were provided by a separate, but connected, company.

This case demonstrates that VAT treatment is ultimately dependent on the specific nature of the arrangements with occupants (in particular, the length of occupation per the tenancy agreement) and the additional facilities and services offered. As a result, providers of accommodation in build-to-rent and co-living schemes may find themselves unexpectedly walking a tightrope between the exemption and the standard rate. Finding the balance between an attractive commercial offering to potential occupants and the VAT impact of those commercial decisions will be key.

For those in the sector, and particularly those considering adopting new rental models, finance and commercial teams should work together to consider the VAT impact of the offering as a whole, paying particular attention to the rental term arrangements and any enhanced service offerings.

As the living sector evolves, it will no doubt continue to clash with the VAT system, and businesses operating in the sector should be alert to the potential VAT implications.

For more information on how VAT may impact your accommodation offerings or to discuss your specific situation, please get in touch with our VAT experts or your usual RSM contact.