VAT Treatment of Labor Camp Accomodation

Labor accommodation refers to areas utilized by employers to house their staff. Question is should landlord charge VAT on this supply of labor accommodation?

Labor accommodation can be divided into two categories for tax payment purposes:

• whether it is a purely residential building and therefore exempt from VAT;  or 
• it’s a Residential accommodation and provides additional services making it subject to the VAT at standard 5 per cent.

Both scenarios are analyzed below.

In case the landlord is supplying labor accommodation only as a residential building, then as per Article 46(2) of VAT Law, the labor camp accommodation is an exempt supply and must not be subject to VAT. Relevant excerpts from Article 46 are reproduced below:

"Article (46) - Supply Exempt from Tax
The following supplies shall be exempt from Tax:

1. ………
2. Supply of residential buildings through sale or lease, other than that which is zero-rated according to Clauses (9) and (11) of Article (45) of this Decree-Law."

However in case landlord is providing furnished accommodation, then it becomes a taxable supply. But to make such accommodation taxable, furnishings should be billed separately from accommodation; which is clearly not the case here - labor accommodation is the principal component of lease agreement, and providing ancillary services is an essential part this accommodation supply. These ancillary services may include:

• Cleaning of communal areas; 
• Maintenance services required for the general upkeep of the property; 
• Pest control; 
• Garbage collection; 
• Security; 
• Utilities like electricity, water, etc.; 
• Access to facilities within the building for residents like launderette facilities, gym, pool, prayer rooms, etc. 

Since supplying labor accommodation is the principal component of this agreement and accompanying ancillary services is an integral part of this supply to make the principal supply  more enjoyable, it will fall under the concept of Composite Supply - Supply of more than one component i.e. article 4 of VAT Executive Regulations. Relevant excerpts from Article 4 are quoted below:

"Article (4)  - Supply of More Than One Component

1. ……

2. The phrase "single composite supply” means a supply of Goods or Services, where there is more than one component to the supply, and taking into account the contract and the wider circumstance of the supply. 

3. A single composite supply shall exist in the following cases: 

a. Where there is supply of all of the following: 

1) A principal component. 

2) A component or components which either are necessary or essential to the making of the supply, including incidental elements which normally accompany the supply but are not a significant part of it; or do not constitute an aim in itself, but are instead a means of better enjoying the principal supply. 

b. Where there is a supply which has two or more elements so closely linked as to form a single supply which it would be impossible or unnatural to split.”

Further, Article 46 of Executive Regulations states that for any supply that is composite and contains more than 1 component as per Article (4) of VAT Executive Regulations, it will be taxed as per the tax treatment of the principal component. In this case, there is no separation of billing between rent of labor camp and associated ancillary furnishing services, later is an integral part of rental agreement. Considering that rent of residential property is VAT exempt, same treatment shall be applicable for labor camp and ancillary services. Hence no VAT.

In case landlord wants to charge VAT on furnishing services, he must bill them separately. Note that a labor camp does not fall under serviced apartment category unless:

• Lease tenure is less than six months; or
• Landlord has a business activity of providing service accommodation.

Meanwhile, some of the additional services that do transform an accommodation into a serviced accommodation – and therefore, subject to 5% VAT – include: Telephone and internet access; cleaning of the rooms, other than purely the communal areas of the property; laundry services, including the regular changing of bed linen; catering; and maintenance services other than those required for the general upkeep of the property.

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