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Letting v Licence: Different but (can be) the same for VAT Purposes

The VAT treatment of lettings and licences can give rise to difficulties, not least because under domestic landlord and tenant law they are quite different things, whilst under VAT law, they may or may not be regarded as the same thing.

Essentially, a licence, with regard to land, is permission to go onto, or to use, the land without getting an interest in the land. A licence only confers rights on the licencee, and is usually given instead of a lease when the owner of the property wants to avoid giving the user of the property rights that would accrue under a lease. For example, a hospital might give a licence to operate a shop in the reception area of the hospital, rather than giving a lease.

The grant of a licence may be the supply of a taxable service liable at the 23% rate, or alternatively may be an exempt letting of the property (subject to the landlord’s option to tax), depending on a number of factors. The difficult question is to decide which type of supply it is for VAT purposes and to distinguish between what constitutes a, prima facie, VAT exempt letting and a licence liable at the 23% rate.

The term "letting" is not defined in the VAT Act or in the superior EU VAT law, Council Directive 2006/112/ECEU. The relevant term used in the Irish legislation is "the letting of immovable goods", whilst the relevant term used in the EU legislation is "the leasing or letting of immovable property."

The Court of Justice of the European Union (CJEU) has pronounced in a number of cases on the term "letting of immovable goods" and it is very much in this context that one has to determine if what is granted is a letting or a licence for VAT purposes.

The following definition "The letting of immovable property for the purposes of Article 13B(b) of the Sixth Directive essentially involves the landlord of a property assigning to the tenant, in return for rent and for an agreed period, the right to occupy his property and to exclude other persons from it." has been repeated by the CJEU in a number of cases pre 2004.

Thus, up until the decision of the CJEU in ‘Belgian State v Temco Europe SA’ it was clear that there were a number of specific elements to a letting of immovable goods:-

  • The tenant gets the right to occupy the property
  • The tenant gets the right to exclude others from the property
  • The tenant pays rent
  • The agreement is for a specified period
  • There is a precisely defined area or space
  • The provision of the area is a passive activity by the landlord

In its decision in the Temco case the CJEU held that where a company granted associated companies licences to occupy a single property in return for payment, set essentially on the basis of the area occupied, and the essential object of the licences was to make the property available in a passive manner for payment linked to the passage of time, the company was letting the property and was not supplying a service capable of being categorised in a different way. In this case the CJEU commented that the actual period of the letting is not the decisive factor in determining whether there is a letting or not, and that the period need not be fixed at the time the contract is concluded. Furthermore the CJEU also commented that as regards the tenant’s right of exclusive occupation, that whilst pursuant to the contract the landlord, or indeed others, such as in this case, may occupy the property with the tenant, but that occupation can still be exclusive as regards all other persons not permitted by law or by the contract to exercise a right over the property. Thus exclusive possession may not apply to one person only.

Essentially, it would seem that if the landlord is engaged in the passive supply of allowing occupation of property only, in return for a rent linked to time, then the licence will be regarded as a letting of the property for VAT purposes.

If the property is being made available for other activities or something which is best understood as the provision of a service rather than simply making property available, such as the right to use a golf course, the right to use a toll bridge or the right to occupy a seat in a cinema, then this would be regarded as the provision of a service to be categorised in a different way to the letting of property.

To determine whether a licence might constitute a letting for VAT purposes one should check the licence against the criteria as set down by the CJEU. Has the owner of the property assigned, the right to occupy his property, in a passive manner for rent linked to time, to the licensee? Has the owner of the property assigned, the right to exclude other persons from his property, to the licensee? Is the agreement for an agreed period? Are these rights given by the owner in exchange for rent (which will most likely be referred to as a licence fee)? Is the agreement for a defined area of space? Is the activity of the owner passive, or is he supplying a service that can be categorised as something different to just making property available?

If the answer to the above are generally in the affirmative, then it is more than likely one is looking at a letting for VAT purposes, and not a licence, albeit that it may well be a licence for the purposes of landlord and tenant law.

The Revenue Commissioners have published some guidance in this area, and the following are some relevant extracts from same.

  •  “The ECJ in Temco admitted that it had previously stressed the importance of the period of the letting but had done so in order to distinguish a transaction comprising the letting of immovable property, from other activities which are either industrial or commercial in nature. The ECJ views the letting of immovable property, a relatively passive activity linked simply to the passage of time and not generating any significant added value, as different from other activities which are either industrial and commercial in nature…..have as their subject-matter something which is best understood as the provision of a service rather than simply the making available of property. Examples of such other activities include the right to use a golf course……the right to use a bridge in consideration of payment of a toll……the right to install cigarette machines in commercial premises…..”
  • “The ECJ considered the right of possession in Sinclair Collis. Here the owner of premises granted to the owner of cigarette vending machines the right to install operate and maintain machines for a period of two years in a place nominated by the owner of the premises. In return the owner of the premises received a percentage of the gross profits on the sales of cigarettes and other tobacco goods dispensed from the machines. The agreement between the premises owner and the owner of the cigarette vending machine gave no rights of possession or control to the machine owner other than those expressly set out in the agreement. The ECJ concluded that the agreement between the parties did not amount to a letting of immovable property……..”
  • “The ECJ concluded in the FML (Fonden Marselisborg Lystbadehavn) case that FML could regard as lettings both its land sites and its mooring berths. FML's relationship with the users of the land sites was such that they had exclusive use of the sites assigned to them for a fixed period and FML’s relationship with its users of water-based mooring berths was that FML could let a mooring berth, that was the subject of a letting to a lessee, when the lessee was not using it for his own use. The ECJ concluded that these temporary lettings did not alter the letting relationship between the lessee and the lessor.”
  •  “While the matter is not completely free from doubt Revenue, having regard to the principles established in the ECJ cases and in particular the court’s decision as to what constituted a letting set out in the Temco case, have decided to apply a revised VAT treatment to admissions to Historic Houses on the grounds that what is involved is not a passive letting…”

Thus, as can be seen, the Revenue position is essentially in line with my commentary above, following the jurisprudence of the CJEU.

Now turning to some practical matters. Where one grants a letting, and one wishes to exercise the landlord’s option to tax and charge VAT on the rents, this can be done with relative ease within the terms of the lease explicitly referencing the exercise of the landlord’s option to tax. However with a licence, one must first determine if it is a licence/supply of a service that can be characterised as other than the passive making available of property. If so, then it is the supply of a service, chargeable to VAT at the 23% rate, unless the service being supplied attracts a lower VAT rate, and the licence agreement should clearly indicate that VAT is payable in addition to the licence fee/consideration, where appropriate.

However, if one determines it is a letting for VAT purposes, but wishes to maintain a licence status for landlord and tenant law, and needs to ensure it is chargeable to VAT, then one needs to be very careful in the terms used. Obviously, an explicit reference to the exercise of the landlord’s option to tax could be prejudicial to the property owner’s position that it is a licence and not a letting for landlord and tenant law purposes. Thus, care needs to be taken, with the use of appropriate wording, to ensure that what is a letting for VAT purposes is opted, with VAT payable in addition to the licence fee/rent.

With property transactions VAT can be quite complex, and I would recommend that VAT issues be addressed earlier rather than late in the day, when concluding on the VAT treatment may well delay a transaction.

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