HMRC have issued Revenue and Customs Brief 6 (2018): VAT exemption for all domestic service charges which lays out possible changes to the VAT exemption of all domestic service charges from 1 November 2018.
Customs and Excise Brief 03/94 issued February 1994 introduced ESC 3.18. which only applies where 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.
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 they are directly linked to an exempt supply of an interest in land. Freeholders do not have this link, so that these charges are normally taxable at the standard rate of VAT.
Landlords often use property management companies or companies which obtain 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. A decision in the courts in 2015 confirmed HMRC’s view of how the concession operates.
HMRC are aware of a number of property management and similar service companies which 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
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.
If you have any clients which operate in this area you may wish to check their VAT position.