VAT on domestic service charges
HMRC has published updated guidance for property management companies and others which confirms that fees charged by property management companies to landlords for providing common services to the occupants and tenants of residential property are subject to VAT at the standard rate.
Our VAT team explains further. A service charge can only be further consideration for the letting of property in a landlord/tenant relationship, and not where it is payable by a freeholder. HMRC, seeing this as potentially unfair, announced a concession in 1994.
The extra statutory concession (ESC) 3.18 exempts all mandatory service charges or similar charges paid by the occupants of residential property towards the upkeep of the dwellings or block of flats in which they reside and towards the provision of a warden, caretakers, and people performing a similar function for those occupants. The concession doesn’t exempt service charges paid in respect of holiday accommodation.
Any other charges take the liability of whatever is supplied, and so are normally standard-rated. Examples include charges that are not towards upkeep, perhaps for the use of sports facilities, or that are not mandatory, such as charges for internal cleaning or decoration agreed by individual homeowners.
Its purpose is to allow the same VAT treatment of the service charges for all of those living on the same estate. Leaseholders and tenants are exempt from paying VAT on the charges as the charge is directly linked to an exempt supply of an interest in land. Freeholders don’t have this link though, so for them, these charges are taxable at the standard rate of VAT.
The concession does not apply and was never intended to apply to the services of a managing agent engaged by someone other than the occupant.
For example if a managing agent A is employed by a company B, and B is entitled to pass the charges to the occupier C, the concession can apply between B and C but not between A and B. It makes no difference that B might itemise A’s charges, or that C might pay A directly. The supply chain is still A-B-C even if A’s charges are paid by C.
Where a landlord is contractually obliged to provide services to all occupants of a common estate, they can choose to use the concession to treat these supplies, when made to a freeholder, as exempt from VAT.
HMRC believes it is aware 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 can’t use the concession to treat their supplies as if they were made to the occupant rather than the landlord, or to recharge costs incurred on behalf of the landlord, back to the landlord.
Revenue and Customs Brief 6/2018 and VAT Information Sheet 7/2018 set out HMRC’s view of the correct application of ESC 3.18, which allows landlords to exempt mandatory service charges paid by both freehold and leasehold occupants of residential property. These publications explain what property management and similar companies must do if they have incorrectly applied the concession, which may have resulted in incorrect amounts of output tax or input tax being declared.
Where errors have occurred in the past, HMRC requires that the correct treatment is applied from 1 November 2018.
The information was correct at time of publishing but may now be out of date.