What’s The Errol Willy Salon vs HMRC Case?
Earlier this the First-tier Tax Tribunal gave a decision in favor of a Cardiff hair salon against HMRC. This verdict comes as a great piece of news for many businesses. It makes businesses renting out a spare room sigh with relief as, after this decision, HMRC’s attempt to avoid the rent charges’ VAT exemption fails.
What does it mean?
For those who didn’t understand, this means that any firm renting a room to a tenant won’t necessarily be subject to an additional VAT charge. Moreover, it doesn’t have to pay extra taxes even if the tenant gets facilities like restrooms and reception services.
What is the guideline for charging VAT on rental income?
According to HMRC’s rules, income from renting out a residential accommodation is usually exempt from VAT. However, there are some exceptions as well. For example, if it extends beyond just letting out a residential room. Or, if the tenant enjoys other facilities then HMRC might not consider it to be eligible for exemption. In fact, it’s obvious why hotel accommodations claim exemption.
What is the case of Cardiff hair salon vs HMRC?
Errol Willy, the owner of the Errol Willy Salons Ltd in Cardiff, bagged a profoundly personal win against HMRC. He claimed that HMRC charged him to pay VAT on the rent he charged to two independent beauticians. They used his two spare first-floor rooms. This was a long case between the hair salon and HMRC and was a very important one for other businesses. Moreover, if HMRC would have won it, any companies renting a room to a tenant may have found themselves facing an extra VAT charge. Glyn Edwards, director of VAT at the top 12 accounting firm MHA defended Errol Willy.
The rent is considered a supply of land. Therefore, it is exempt from VAT. However, HMRC argued that Errol Willy Salons Ltd gave the beauticians a wider range of services than just two rooms. It included access to the staff restrooms and rest area, a receptionist’s help, light, heat, and advertising. As a result, based on the rent Errol Willy charged the beauticians, HMRC imposed a VAT assessment for £18,000.
What was Errol Willy’s stand?
According to the First-Tier Tax Tribunal, Errol Willy was correct. He claimed that the extra services he was giving his tenants were incidental. Moreover, the use of the receptionist occasionally, access to the staff restrooms, and the brief advertisement provided by Errol Willy were all found inessential to the beauticians’ operation. Thus, according to the court, Errol’s primary supply to the beauticians was the rental of a room. And that was appropriately considered a VAT-exempt supply.
Glyn Edward said that it’d have exposed thousands of salons to similar attacks whenever they’d have provided additional services together with room rental to beauticians working independently in a salon. Thus, such a victory for HMRC may have had broader repercussions. Any company that rents out a spare room to a renter (such as an accountant or lawyer who rents out a room to a financial advisor) may have put themselves at risk of a VAT assessment. As a result, many small enterprises as well as some larger ones that rent out extra rooms have escaped this situation unharmed.
A landmark decision
It appears likely that HMRC pursued this case to determine where to draw the line between a supply of a room (VAT exempt) and a supply of services in which the room is a component (taxable). In a previous instance involving the provision of rooms to masseurs by a massage parlor, HMRC prevailed. However, compared to Errol Willy Salons Ltd., the massage parlor provided a significantly greater range of services.
So, Errol Willy continued to pursue the case, which he started five years ago. He did it in support of his late wife Michelle Willy, making the victory a very personal one for him. She was a fellow director at the company named Michelle who lost her battle with cancer in 2019. Besides, Michelle participated actively in the case early on and was Miss Great Britain in 1981.
Errol Willy commented on the case that their success at the First-tier Tax Tribunal is a victory for small businesses all around the country. This case was not about money; it was about justice and wrong. Moreover, without perseverance and hard effort, they would not have prevailed in this matter. Further, he adds that he hopes for this example to be useful to other companies with similar circumstances. He says that his late wife Michelle tragically passed away in 2019 while they were in disagreement with HMRC. Therefore, the matter became quite personal to him and he felt driven to continue the fight. Finally, his success would have made his late wife very happy.
