By Jaspal Dhillon, VAT Director
020 7490 7766
In 1994 HMRC introduced an extra statutory concession which makes service charges to certain residential tenants VAT exempt, in circumstances where they would be standard rated under the normal VAT rules.
HMRC have announced changes to the operation of the concession, effective from 1 November 2018, which has the potential to create VAT charges on service charge costs to landlords, which they may not have previously incurred. To note, as the landlord will be making a VAT exempt supply of residential property, they are unlikely to be able to recover VAT on costs.
The purpose of the concession is to enable the same VAT treatment on mandatory service charges to a freehold occupant, as to a leaseholder or tenant living on the same common estate. This is because under normal VAT rules such charges are exempt from VAT when made to leaseholders or tenants, as they directly link to an exempt supply of an interest in land from the landlord, but standard-rated for VAT when made to freeholders as they constitute a separate supply not linked to a supply of an interest in land.
If you are a landlord of a common area of a shared residential estate, the concession allows you to treat these mandatory charges to freeholders of property on that estate as exempt from VAT, if you so wish.
The services covered by the concession are as follows:
- Upkeep of the common areas of the estate, dwellings or blocks of flats where the occupants live and where these charges are mandatory for all the occupants.
- Provision of a warden, superintendent, caretaker or those performing a similar function connected with the day-to-day running of that estate, dwelling or blocks of flats, for those occupants.
- General maintenance of the exterior of a block of flats or individual dwelling - where the residents cannot refuse this.
Where a landlord is contractually obliged to provide services to the occupant of a property, and uses a property management company or similar, to provide these services, the property management company cannot use the concession. This is the key change that is being made with regards to the concession. This is because the management company is providing a standard-rated supply of services to the landlord, not the occupant, even though they’re collecting payment on behalf of the landlord directly from the occupant.
To discuss this and any other matters relating to the above changes in more detail and in particular to assess any planning opportunities, which may be available for landlords operating larger estates, please contact our VAT Specialist, Jas Dhillon (firstname.lastname@example.org)