Holiday Accommodation – Agent or Principal?
A First Tier VAT case was released recently, which has potential ramifications for what constitutes income, for VAT purposes, for businesses letting holiday chalets.
The issue was whether the taxpayer, Wilson Leisure Developments Limited (WLD), acted as an agent or principal in the letting of chalets purchased by individuals at the parks operated by WLD. WLD sells the lodges; the lodge owners can then generate income through either a “casual rental” scheme where the lodge owner has to arrange and pay for cleaning, changing bed linen, etc. or a Guaranteed Rental Income (GRI) scheme.
It was the second scheme that the Tribunal was concerned with which could only be operated through WLD. WLD guaranteed a return of 6% to the chalet owners and WLD arranged for the cleaning, etc. WLD then agreed with a third party marketer (in this instance Hoseasons) to market the lodges. The lodge owner had no say in who can and cannot rent their lodge, although the GRI did impose some obligation on the lodge owner that the lodge is kept in good repair.
A key issue was that when a clause in the agreement between the lodge owner and WDL that said: “The Holiday Home Owner agrees that a commission of 20% plus VAT will be deducted from each hiring fee to be retained by the Company, but only after the Guaranteed Minimum Rental Figure has been reached. The 20% amount will then apply to all bookings made including those counting towards the Guaranteed Rental Income.”
When investigated further, WDL said that this clause had never been invoked as the guaranteed return figure had never been met. This led the Tribunal to conclude:
“Although neither party addressed us on this point, we have been struck by the unusual nature of the arrangements, to use a neutral term, between WDL and the lodge owners using the GRI scheme. Mr Wilson” (a director of WDL) “said in his evidence that in no case has the net rental income actually earned, to date, exceeded the guaranteed amount, from which it follows that WDL has either made a loss, or at best has broken even, in every case. The conclusion we draw is that the underlying purpose of the scheme, from WDL’s perspective, is to encourage potential investment purchasers, rather than to operate a rental scheme for its own sake. It may be this factor which has led to its failure to structure the arrangements so that it acts only as the lodge owner’s agent.”
There were other issues which counted against WDL, and the Tribunal agreed with HMRC that WDL was a principal in making the supply.
This meant that VAT was due, from WLD, on the total rental income generated rather than just any commissions retained by WDL. The result of this was an assessment, in excess of £400,000 additional VAT, due to HMRC.
The Tribunal had pointed out that it should have been possible to structure arrangements to enable WDL to be seen as agent. It may therefore, be prudent for businesses in this sector to review their documentation to ensure it correctly reflects the relationship between the chalet owner, the letting business and the holiday maker.
HMRC will have this “win” on their radar and may be looking for similar businesses to visit.
If you wish to discuss the above please contact us.