VATP003 – VAT Public Clarification on labour accommodation: residential versus serviced property
The Federal Tax Authority classified labour accommodation into two categories for tax payment purposes .There will be instances where the supply of certain labour accommodation shall be a supply of residential property, and other instances where the supply of certain labour accommodation shall be a supply of serviced accommodation.
Labour accommodation will be considered as residential buildings and hence not subject to VAT (the first supply is zero-rated, and subsequent supplies is exempt) if,
- The building is occupied by the employees as their principal place of residence.
- The building that is fixed to the ground and which cannot be moved without being damaged.
- The building has been constructed or converted with lawful authority.
- It is not a building which is similar to a hotel, motel, bed & breakfast establishment, or serviced apartment for which services in addition to the supply of accommodation are provided.
But if additional services are given to a labour accommodation it will be treated as serviced accommodation and will be taxable at 5%.
According to the Public Clarification, if services are provided in addition to the labour accommodation which are considered incidental to the supply of accommodation, it will not be considered a serviced accommodation.
These are services which are basic and considered necessary and generally integral to providing the supply of the residential building including:
- Cleaning of communal areas
- Maintenance services required for the general upkeep of the property
- Pest control
- Garbage collection
- Utilities e.g. electricity, water, etc.
On the other hand supplying non-incidental services in addition to the core labour accommodation would cause the accommodation to be considered a supply of serviced accommodation.
Additional services indicating a supply of serviced accommodation includes:
- Telephone and internet access
- Cleaning of the rooms, other than purely the Communal areas of the property
- Laundry services and the changing of bed linen.
- Maintenance services other than those required for the general upkeep of the property.
It may be noted that the above list is indicative and not exhaustive.
Composite supply or Mixed supply
The FTA noted that suppliers of labour accommodation should also consider whether they are making a single composite supply (of either residential accommodation, or serviced accommodation based on the above), or whether they are making a mixed supply with separate component parts.
If different charges are charged separately to the customer, the supply may not be regarded as a single composite supply and the supply would be regarded as a mixed supply.. Where a single composite supply is made, the entire consideration for the supply shall be subject to the VAT treatment of the principal component. Where a mixed supply is made, each component part must be valued and the correct VAT treatment applied to each component part.