HMRC has published updated guidance on the VAT exemption for domestic service charges which has been erroneously relied on by some landlords and property management companies.
In many cases, where a landlord owns an estate, group of dwellings, or block of flats, they will charge occupants a fee to cover the landlord’s contractual obligations for maintenance and upkeep of the common areas.
Under normal Buy-to-Let VAT rules, the service charges to leaseholders would be exempt as they are directly linked to the underlying supply of exempt residential property.
This immediate link to an exempt supply does not exist where the occupant is a freeholder of a property not a leaseholder. Under normal VAT rules, this would mean this service charge would be standard rated.
Under Extra Statutory Concession (ESC) 3.18, these mandatory service charges or similar charges paid by occupants are exempt from 1 April 1994. This was to enable freeholders which share common estates with leaseholders to be on a level footing.
The services covered are:
- Upkeep of common areas of an estate, dwellings, or blocks of flats, where the charges are mandatory.
- Provision of a warden, superintendent, caretaker, or similar connected with day-to-day running of the estate, dwellings or blocks of flats.
- General maintenance of the exterior of a block of flats or individual dwellings where the residents cannot refuse this work.
In some cases, a landlord will use a property management company (PMC) to deal with the landlord’s contractual obligations. This may extend to collecting the service charges from the occupants and often the PMC will deduct its fees from those monies collected, before passing on any excess to the landlord.
Despite the fact that the PMC may be collecting monies from the occupants, there is no supply of these mandatory services to the occupants by the PMC. The PMC is supplying the landlord with property management services as it is the landlord that is contractually obliged to deal with the upkeep etc.
HMRC are aware that PMCs have been:
- Treating supplies the landlord is contractually obliged to provide as if made by the PMC to occupants and applying the concession. The supplies are to the landlord and are not within the concession. They should be standard rated.
- Recharging the cost of staff or personnel costs to the landlord and applying the concession. This is a taxable supply.
- Recovering VAT on costs and recharging the costs direct to occupants and applying the concession. These costs should be recharged to the landlord, i.e. the person contractually obliged to incur them. The concession would not apply to this recharge. It is possible that they could be treated as a Disbursement if the PMC acts as Agent, in the name of the landlord, though VAT would not be recoverable by the PMC if treated as a disbursement.
PMCs should also be aware that standard rating applies where the PMC provides occupants directly with additional services that:
- The landlord is not contractually obliged to provide, or
- Are not in the list of services above that can qualify for ESC treatment.
Businesses must use the correct VAT treatment for supplies from 1 November 2018 onwards. Any services prepaid that relate to services performed post 1 November 2018 must also apply the correct treatment, and where prepaid services will be performed pre and post 1 November 2018, they must be apportioned.
Links
External link
Revenue and Customs Brief 6 (2018): VAT exemption for all domestic service charges
