Is VAT payable on service charges?


Author: John Forde


HM Revenue & Customs (HMRC) has confirmed that its policy on the VAT treatment of service charges will remain unchanged despite a recent ruling of the European Court of Justice (ECJ) that had appeared to conflict with its longstanding position.

In its new guidance, issued on 27 October 2009, HMRC states that its policy remains that a service charge will:

  • take the same VAT treatment as the rent (i.e. exempt from VAT if the rent is exempt from VAT) if the service charge is provided as a term of the lease and the services are provided by the landlord (or his agent) without tenant choice; but
  • be a standard rated VATable supply (regardless of whether the rent is exempt from VAT or not) if the provision of the service charge is not a term of the lease or if the service charge is provided by someone other than the landlord (or his agent).

Confusion as to whether HMRC’s position was correct had arisen following the decision in Tellmer – an ECJ case. Tellmer was a Czech company that owned a block of flats which it rented out (the letting of residential property is exempt from VAT). Tellmer also charged tenants separately for the cleaning of the common parts of the building. Tellmer sought to argue that the cleaning services were ancillary to the letting of the flats and therefore should form part of a single VAT exempt supply of residential property. The Czech tax authorities did not agree – they viewed Tellmer as supplying two separate services i.e. a supply of residential property (VAT exempt) and a distinct supply of cleaning services (VATable). The matter was ultimately referred to the ECJ who determined that there were two separate supplies and noted that cleaning services simply did not fall within the concept of letting property. This appeared to conflict with HMRC’s longstanding position that letting and related services form a single property related supply where the services are provided as a condition of the lease. HMRC’s new guidance explains that it does not regard its current practice as inconsistent with Tellmer. It states the ECJ came to its conclusion because the services supplied were not obligatory and the tenants had a choice over who supplied them – although there seems no justification for this assumption in the facts of the case.In light of HMRC’s new guidance landlords should check that they are applying the correct VAT treatment to service charges. HMRC may yet be forced to alter its policy to take account of the ECJ decision in Tellmer so landlords should keep the position under review. In any event landlords should also seek to protect themselves contractually to ensure that if VAT is due on any service charge they will have the right to charge it to their tenants. If the lease is silent on the point then any service charge will be deemed inclusive of VAT and the landlord could end up bearing the cost.

John Forde, Solicitor, Fladgate LLP (jforde@fladgate.com)

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