VAT on Service Charges?

VAT on Service Charges?

9:06 AM, 14th January 2019, About 3 years ago 3

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I first heard about this on BBC Moneybox.

It inferred that service charges for leaseholders (and many landlords) will be subject to VAT from Nov 1 2018. In short, HMRC are waiving the prior 24 years, but now enforcing this change.

Looking closer is more opaque – possibly the managing agent will now have to charge VAT to the freeholder and this could mean the freeholder increases service charge fees to leaseholders to recover this?

Can anyone shed any light on this?

Worth knowing before you buy your next leasehold.

https://www.gov.uk/government/publications/revenue-and-customs-brief-6-2018-vat-exemption-for-all-domestic-service-charges/revenue-and-customs-brief-6-2018-vat-exemption-for-all-domestic-service-charges

Many thanks

Jon

3. Background

Customs and Excise Brief 03/94 issued February 1994 introduced ESC 3.18. The concession applies only when residential leaseholders and freeholders pay a mandatory service charge for the same common services on a common estate. Its purpose is to allow the same VAT treatment of these service charges for all of those living on the estate.

The concession came into effect from 1 April 1994. If a landlord is contractually obliged to provide services to all occupants of a common estate, they may choose to use the concession to treat these supplies, when made to a freeholder, as exempt from VAT.

Leaseholders and tenants are exempt from paying VAT on these charges as the charge is directly linked to an exempt supply of an interest in land. Freeholders do not have this link, so for them, these charges are normally taxable at the standard rate of VAT.

Landlords often use property management companies or companies offering similar services, to fulfil their legal obligations to the occupants of an estate. The property management company obtains goods and services on behalf of the landlord and charges a management fee for providing such a service. This management fee is taxable at the standard rate of VAT and is not covered by ESC 3.18. Property management companies, or similar, cannot use the concession.

The Upper Tribunal (Lands Chamber) decision of 15 September 2015 in the case of Mrs Janine Ingram (2015) UKUT 0495(LC) confirmed HMRC’s view of how the concession operates.

HMRC knows of a number of property management and similar service companies who provide goods and services to landlords of residential buildings, but are not correctly accounting for VAT. These companies cannot use the concession to:

  • treat their supplies as if made to the occupant rather than the landlord
  • recharge costs borne on behalf of the landlord, back to the landlord
  • recharge staff or personnel costs to the landlord

4. Action needed

From 1 November 2018, all property management companies, and companies supplying similar goods and services in similar situations, who have not correctly applied ESC 3.18, must correctly account for VAT, as explained in VAT information sheet 07/18.

The content of this brief, VAT information sheet 07/18 and updated section 12 of Land and property (VAT Notice 742) cancels and replaces any guidance or advice that HMRC has previously provided on this subject.



Comments

by David Price

12:32 PM, 14th January 2019, About 3 years ago

First I have heard of this but as the funds belong to the leaseholders not the management company then I do not see how VAT could possibly be applied. Even if VAT were levied surely the management company could become VAT registered and the VAT on expenditure recovered - net result zero?

by John Frith

13:27 PM, 14th January 2019, About 3 years ago

The 4th para of the "Background" section states:
"The property management company obtains goods and services on behalf of the landlord and charges a management fee for providing such a service. This management fee is taxable at the standard rate of VAT and is not covered by ESC 3.18."

So my understanding is that the article is about VAT on the fee the management company charges for it's own services, but not (as David points out) on the expenses which it pays from the leaseholders funds.

by Jon D

17:58 PM, 19th January 2019, About 3 years ago

Small estate management companies will be operating under the VAT threshold and hence no VAT due on service charges. Freeholders who invoice leaseholders directly are also not VAT applicable.

Larger management companies who are VAT registered have to apply VAT... somewhere. As the service charge demand is not directly from the landlord, there is VAT applicable on at least a portion of it. That was my understanding. Still no wiser.


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