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HMRC internal manual

VAT Input Tax

HM Revenue & Customs
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Specific issues: accommodation provided to employees

Sometimes a business has to provide domestic accommodation to its employees to make running the business easier. This cost is wholly for a business purpose.

Frequently farms and hotels provide accommodation for staff because it is essential to have them available at all times of the day. Often there is very little or no suitable accommodation available within reasonable distance of the business premises.

In such cases the tax incurred on providing and maintaining accommodation is seen as necessary for the purposes of the business. The tax is regarded as input tax. The Supply of Services Order should not be applied.

An employer may charge their staff for the provision of accommodation. This would be an exempt supply by the employer. The VAT incurred remains input tax but would be subject to partial exemption restrictions.

Sole proprietors and partnerships may employ family members to work for them. Company directors are technically employees of the companies they control. Directors are unlike other employees in that they or their relatives have the power to make decisions regarding the expenditure of business funds.

The motive for providing accommodation for no other purpose than to accommodate directors or a relative may be purely personal. In such cases you are to apply the normal business purpose tests at VIT10200. In particular you should apply the “Rosner” test (see VIT61360). Input tax should be claimed only when the accommodation is provided for genuine business purposes.

Some business may incur VAT on renovating accommodation which will be lived in by family members in circumstances where the purpose is both business and private. When this happens an apportionment of VAT on the builder’s services would be required. See VIT25000.

If an employer pays for:

  • goods which become the property of its employees;
  • the domestic fuel and power of its employees; or
  • the private telephone calls of employees;

the VAT incurred is treated as the employer’s input tax. The business must account for output tax as either a supply of goods or a supply of services as appropriate.

Many larger farming businesses continue to provide their former employees with accommodation after retirement. Existing employees may see this as a reward for their own good service. The properties remain business assets which will in due course again be occupied by serving employees. In such circumstances we accept that VAT incurred on repair and maintenance of the properties occupied by former employees and their families is input tax.

If a domestic room (or rooms) is put to business use an apportionment may have to be agreed. An objective test of the extent to which the room is put to business use should be made. This approach is unlikely to give a business proportion of more than 25%. The principle is illustrated by the case of RS & EM Wright Ltd but you should contrast that decision with that in F J Meaden Ltd and refer also to Sangster Group Ltd. For more on these cases see VIT64150.

There are no special concessions for owners of businesses or company directors who are not normally resident in the UK. The normal business purpose considerations at VIT10200 apply.