28 September 2006

HM Revenue & Customs

http://www.hmrc.gov.uk

Business Brief

Business brief

Contents:
1. VAT: The Reduced Value Rule for long-stay guests in hotels - revised interpretation of the law on VAT treatment

2. Gaming machines: Accounting for VAT

3. Registered Dealers in Controlled Oils : revised Public Notice 192 , Section 5

1. VAT: THE REDUCED VALUE RULE FOR LONG-STAY GUESTS IN HOTELS - REVISED INTERPRETATION OF THE LAW ON VAT TREATMENT

This Business Brief article announces a change in HM Revenue & Customs' (HMRC) interpretation of the law regarding the application of the reduced value rule for long-stay guests in hotels. This change has been incorporated in an update to VAT Notice 709/3: Hotels and Holiday Accommodation, issued recently.

The change affects the treatment of supplies of overnight accommodation made by hotels (which includes inns, boarding houses and similar establishments), where the accommodation is provided to individuals for periods exceeding 28 days. Stays of up to and including 28 days are unaffected by the change and will continue to be subject to VAT at the standard rate.

Background
Many people, for a variety of reasons, "live" in hotels or similar establishments for long periods. As the exemption from VAT for supplies of residential accommodation (for example in houses and flats) does not extend to the accommodation provided by hotels, such people would be disadvantaged. In order to provide greater consistency of treatment, a special valuation rule has the effect of treating supplies of accommodation by hotels as VAT-free from the 29th day of a person's stay. The rule (often referred to as "the reduced value rule") restricts the VAT charge to the part of the payment that is not for accommodation. As a result, where an inclusive charge is made, VAT continues to be due on the part of the charge that relates to meals and drinks, plus other services and facilities provided with the accommodation. Details of how to arrive at the part of the charge subject to tax are given in Notice 709/03: Hotels and holiday accommodation. The supply of the accommodation does not become an exempt supply, so there is no restriction to the amount of input tax the hotel can claim as a result of the rule.
It has been the view of HMRC that the rule only applies where the supply of the accommodation is made to the individual who will occupy it and that where the supply of the accommodation is to third parties, such as local authorities, VAT is applicable to the total charge regardless of the length of the individual's stay.

Revised interpretation of the law
Following the recent decision of the Tribunal in the case of Afro Caribbean Housing Association, HMRC now accepts that the reduced value rule is not limited to situations where the VAT supply is made to the individuals occupying the accommodation. This means, that where, for example, hotels contract with local authorities or other organisations for the provision of accommodation, for example to homeless people or asylum seekers, this can qualify for treatment under the reduced value rule.
However, there are no other changes to HMRC's interpretation of the rule, which means that it still only applies where the same individual is using the accommodation for a continuous period that exceeds 28 days (the first 28 days of each individual's stay is always subject to VAT on the full value). It does not apply, for example, where accommodation is block-booked by companies for periods over 28 days and is used by a number of different individuals for individual periods of less than 28 days. It also does not apply to holiday accommodation. Notice 709/3: Hotels and holiday accommodation describes in detail how the rule works.

Making claims or adjustments
The change described above should be implemented from the date of this Business Brief and there is no requirement to make adjustments in respect of supplies made

prior to this date. However, where hotels or other establishments wish to make a claim to HMRC for a repayment of output tax incorrectly paid, they may do so, subject to the conditions set out below, by using one of the following methods (full details are given in VAT Notice 700/45: How to correct VAT errors and make adjustments or claims):

* where the total of previous errors do not exceed £2000 net tax, an adjustment may be made to your current VAT return, or

* where the total previous errors exceed £2000 net tax a separate claim should be submitted to HMRC (in these cases the errors must not be corrected through your VAT returns).

Details of where to send your claim can be obtained from update 2 to VAT Notice 700/45: How to correct VAT errors and make adjustments or claims or the HMRC National Advice Service on 0845 010 9000.

All adjustments or claims are limited to a three-year period and businesses must be able to produce evidence that they accounted for VAT in the circumstances described above, and must be able to substantiate the amount claimed. Subject to the three-year limitation period, any claim should also be for all prescribed accounting periods in which the error occurred. Should a claim not take into account all errors or all affected accounting periods, then HMRC will seek to set-off amounts owed to us for these periods against amounts claimed in other periods.

HMRC may reject all or part of a claim if repayment would unjustly enrich the claimant. More details on 'unjust enrichment' can be found at part 14 of VAT Notice 700/45 How to correct VAT errors and make adjustments or claims.

A notification to HMRC that a business intends making a claim in the future is not a valid claim.

Where you are in any doubt about the correct treatment please contact the National Advice Service on 0845 010 9000.

2. GAMING MACHINES - ACCOUNTING FOR VAT

In Business Brief 23/05 (issued on 5 December 2005), we advised that the change to the definition of a gaming machine for VAT purposes created certainty by confirming that where the element of chance in the game is provided is not relevant. This followed attempts to avoid VAT by reconfiguring and developing machines so that the random number generator (RNG), which determined the outcome of the game, was sited outside the machine. HMRC consider that the majority of these machines were in fact gaming machines, even before the change in the definition in December 2005, despite having their RNGs fitted outside the main body of the machine. As such, VAT should have been accounted for, and the machines licensed as gaming machines.

It has come to our attention that some businesses failed to license or account for VAT on these machines or have submitted claims to HMRC requesting repayment of VAT that had been paid.

As VAT was correctly payable on these machines, repayments will not be made and, where tax has been underdeclared, assessments will be issued. If you consider you have been misdirected, you should advise your local Business Centre.

Further information
For further information and advice, please contact HM Revenue & Customs' National Advice Service on 0845 010 9000.

3. REGISTERED DEALERS IN CONTROLLED OILS: REVISED PUBLIC NOTICE
192, SECTION 5

The aim of this Business Brief article is to invite comments on the draft revision of Public Notice 192 - Registered Dealers in Controlled Oils, Section 5. We have recently re-written section 5 of this notice to take account of shortcomings identified by the trade. If you would like to comment on the content of the revised section 5, you can obtain a copy in print or by e-mail from the following address:

Miss P.M. Cooper,
HM Revenue & Customs
Excise & Stamp Taxes, Oils Team,
3rd Floor West,
Ralli Quays,
3 Stanley Street,
Salford,
M60 9LA
Tel: 0161 827 0910
or e-mail: paula.cooper@hmrc.gsi.gov.uk

The views expressed in this Business Brief are those of HM Revenue & Customs.

GENERAL ENQUIRIES:

For general enquiries please contact HM Revenue & Customs' National Advice Service on 0845 010 9000.

This release and other information about HM Revenue & Customs can be found at our website: http://www.hmrc.gov.uk

Business Briefs are available by subscription from the News Distribution Service, Government News Network, Hercules Road, London, SE1 7DU

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