VAT relief and hospitality: an unintended extension

This article suggests that temporary VAT relief intended to support the hospitality industry during the COVID-19 pandemic has also unwittingly been given to activities outside the hospitality industry, in particular static caravan parks, and which have not been prejudiced by Government restrictions on operating businesses.

Basically there are three operational models for static caravan sites.

Model 1. Caravan site operators license a pitch for the siting of a privately owned caravan for permanent use. They are generally called “residential caravans” or “park homes”.

Model 2. Caravan site operators license a pitch for the siting of a privately owned caravan for restricted time use (typically 10 months in each successive year), usually to conform with planning requirements. These often tend to be called “holiday” caravans, but this is a misnomer because they can be used for (possibly limited) residential use and any other purpose permitted by site rules. I will call them “licensed caravans”. These owners simply have normal rights under contract and consumer protection law, exactly as you do if you buy a car or rent a parking space.

Model 3. Caravan site operators hire out their own caravans for temporary holiday use, properly called “holiday-let caravans”.

In most details, model 2 licensed caravans differ from model 3 holiday lets. Pitch licence fees are usually paid annually in advance, which ensures that the site operators are fully funded for the year in advance of providing the agreed services, and contractually cannot close the site in breach of the contract terms.

VAT relief

In June 2020 the Chancellor announced VAT relief as part of plans to support business during the pandemic. Originally at 5% up until 12 January 2021, it was subsequently extended to 30 September 2021, and then at 12.5% up to 30 April 2022. The regulations, the Value Added Tax (Reduced Rate) (Hospitality and Tourism) (Coronavirus) Order (SI 2020/728), are the only legislation to recognise the existence of licensed caravans, although in the limited context of very specific requirements for taxation purposes.

A simplified description is that reduced rate VAT “is to be charged on: (1) the grant of any accommodation in a caravan which is advertised or held out as holiday accommodation or as suitable for holiday or leisure use [i.e. holiday lets]; and (2) the provision of a pitch on a holiday site, or a non-residential pitch on any other site, and the grant of facilities at caravan parks to persons for whom such pitches are provided [i.e. licensed caravans]. A ‘non-residential pitch’ means ‘a pitch which is provided for less than a year, or is provided for a year or more and may not be lived in full time throughout the period and not intended as a principal place of residence’”.

This is as careful a definition of a “licensed caravan” as seems possible, and it is made with the full knowledge that these are not “holiday” caravans, because in the temporary provisions it introduces to sched 7A to the Value Added Tax Act 1994, the relevant heading is “Holiday accommodation etc”, thereby recognising that the exemptions may cover non-holiday caravans.

HMRC publicity however (VAT notice 709/3, 8 June 2020) conflated licensed caravans with holiday lets: “Holiday homes. Holiday accommodation includes, but is not restricted to: a caravan. Accommodation advertised or held out as suitable for holiday or leisure use is always treated as holiday accommodation. There may be a restriction under which occupation of the property throughout the year is not permitted, but this will not always be the case.

“If you provide holiday accommodation in any type of caravan already sited on a pitch, your supply is standard rated or temporarily reduced rated. For VAT purposes, the term ‘caravan’ includes mobile homes, park homes, touring caravans and static caravans.”

The practice of HMRC has been to allow the reduced rate to licensed caravans on the basis that they “provide accommodation” – despite the evidence of its own regulations making it clear they were nothing of the sort. Licensed caravans are therefore outside the relief HMRC intended to grant (i.e. on holiday lets), but within the terms of the relief it actually granted.

Intentions and effect

HMRC's intentions were set out (Policy paper, “Information on the reduced rate of VAT for hospitality, holiday accommodation, and attractions”, 15 July 2020) as: “Policy objective. To support businesses and protect 2.4 million jobs the Government will temporarily apply a reduced rate of VAT (5%) to certain supplies in the tourism and hospitality sectors.”

The thinking was to allow providers of goods and services to the public in the “hospitality” sector (such as food and drink sold over the counter in shops and cafes), and normally sold at an all-in VAT-inclusive price, to continue to charge those prices but to retain the “discount” for themselves as recompense for any trading losses incurred during enforced closure. This reduction in the tax take of the Treasury would then allow them to stay in business and provide continuing employment.

As regards licensed caravans, however, what the concessions actually did was one of two things:

• where the pitch licence fee is expressed as being an amount of money “plus VAT”, the benefit of the reduced tax goes to the licensed owner, who is not a provider of any services, employs no one and has made no trading loss; or
• where the pitch licence fee is expressed as an inclusive amount, the benefit of reduced tax goes to the site operator, who has a prepaid contract and has made no trading loss. Some standardised pitch licence contracts allow the site operator to increase the pitch fee to cover an increase of VAT, but have no requirement to reduce it on a reduction of VAT (possibly a candidate for being “an unfair term of a consumer contract” under the Consumer Rights Act 2015, s 62).

Whichever of these two results occurs, the prepaid nature of the contract means that no jobs should have been lost in the first place.

I wrote to the Treasury about this, but they still extended the relief as noted above.

In summary

To recapitulate: these tax exemptions were intended by the UK Government to cover only “hospitality” activities such as holiday lets; but the exemptions actually covered some non-hospitality situations such as owner-occupied caravans, and were applied by the Treasury to these non-hospitality situations, originally in full knowledge, but then under the mistaken belief they were in fact hospitality situations; and with a large loss to the taxpayer.

It is instructive, perhaps, to compare this situation with that of rates relief (discussed in the May 2021 issue). Despite differences of jurisdiction, ministerial responsibility, tax traditions, professional practices and detailed definitions, the original misapprehension as to the legal status of certain caravans led to identical but unintended results.