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Errol Willy Salons Ltd v HMRC

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Are rooms rented out by beauty salon exempt from VAT?

Land v other services

If you provide a land service to a tenant or user of your building, the starting point is that it is exempt from VAT as rent. This will be a VAT saver for your tenants who are either not VAT registered or exempt from VAT, e.g. an insurance broker. Non-land services are usually standard-rated. HMRC’s guidance and past tribunal cases have indicated that a land service must pass four tests:

• there must be a clearly defined area of land being rented out
• the tenant - or user - has the right to occupy this area to the exclusion of all others
• the rental period must have an agreed period of time; and
• there must be payment by the tenant for use of the area in question.

Tip. Our subscriber should have a separate written rental agreement or lease for all of her tenants and not just a verbal or casual arrangement.

Trap. If our subscriber has opted to tax her interest in the building with HMRC at any time in the past, the rental income will be standard-rated.

Room rental

Our subscriber is renting out three rooms on the first floor of the salon to different business owners. Each owner will have controlled access to the rooms (their own lock and key) and store their equipment and stock there. A fixed monthly rental charge will apply. The subscriber will also supply and wash towels as part of the arrangement and clean the rooms on a weekly basis. These services will be included as part of the agreement. The arrangement is clearly a land-related supply; the supply of towels and the room cleaning is incidental to the main supply and can be ignored.

Trap. If a separate charge was made for towels and cleaning, i.e. outside of the rental arrangement, these payments would be subject to VAT.

What about a turnover rent?

Our subscriber asked if there would be a problem charging rent based on the turnover achieved by each tenant.

In a recent tribunal case - Errol Willy Salons Ltd - HMRC issued an output tax assessment because the charge for renting out rooms in a beauty salon was calculated according to the tenant’s turnover rather than a fixed amount based on, say, a square footage basis. The tribunal allowed the company’s appeal because it was still a land supply.

Tip. Turnover rents are common for many business sectors, e.g. breweries renting pubs to tenants. Your rental agreements should be clear that a land supply is being made, irrespective of the way of calculating the rent.

Chair rental

Our subscriber also rents out chairs to self-employed stylists and has always charged VAT on this income. The VAT charge is correct because she is giving the stylists the “right to trade“ in her premises rather than making a land supply. A supply which gives a business the “right to trade” is standard-rated.

Tip. Any doubt about the VAT liability of rent-a-chair arrangements was ended in 2012, with the law amended to exclude it as a land supply. You should quote the legislation or refer to HMRC’s guidance if a tenant disputes the VAT charge.