Andrew Needham looks at the VAT position of services charges on domestic property.
A service charge is a charge made to tenants or owner occupiers (leaseholders) for the upkeep of common areas of an estate or apartment block, such as paths, driveways, communal gardens and children’s playgrounds, corridors, lifts, etc. These sums are due under the terms of the lease or tenancy agreement.
Is VAT charged on service charges?
The general rule is that a service charge is ‘further consideration’ for the main supply. It is therefore normally an additional payment for the main supply of a property rental or lease and is exempt from VAT.
However, if a management company provides services to freehold owners of dwellings, the supply is taxable because there is no supply of domestic accommodation to link those services to.
HMRC considered that this was unfair to freehold owners, especially those living on the same estate as leaseholders. To address this inequity of treatment between owner-occupiers and tenants or leaseholders, an extra-statutory concession allows all mandatory service charges paid by occupants of dwellings towards the:
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upkeep of the common areas of a housing estate, such as paths, driveways and communal gardens; or
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upkeep of the common areas of a block of flats, such as lift maintenance, corridors, stairwells and general lounges; and
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general maintenance of the exterior of the block of flats or individual dwellings, such as painting; and
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provision of an estate warden, house manager or caretaker,
to be treated as exempt from VAT.
An exception to the exemption was highlighted in the case of Canary Wharf Ltd (LON/95/ 2869 No 14513). Repairs and maintenance, servicing common areas and car parking were held to be separate standard-rated supplies rather than part of the rent when supplied by a management company direct to the tenants. The decision was based on the wording of the lease and the fact that the services supplied were more extensive than those necessary to ensure ‘quiet enjoyment’ of the property by the tenants. It is therefore important to ensure that the lease is correctly drafted in order to avoid a VAT charge to residents.
Where this concession is applied, the services charge becomes exempt, so any input tax incurred on related maintenance costs, etc., cannot be reclaimed by the service provider and adds to their base costs which will be passed on to residents.
Separate charges
If the landlord makes a separate charge for unmetered supplies of gas and electricity used by occupants, it should be treated as further payment for the main supply of exempt domestic accommodation. However, if the landlord charges occupants for separately metered supplies of gas and electricity, the charges are subject to VAT at the reduced rate.
Optional services supplied personally to occupants, such as shopping, carpet cleaning or painting a private flat, are standard-rated.
Charges by managing agents
A managing agent collecting the mandatory service charges from the occupants on behalf of the landlords can treat the charges as exempt, provided the agent invoices and collects the service charges directly from the occupants.
However, any management fee charged directly by the managing agents to the occupants is standard-rated because it relates to the managing agent’s supply to the landlord, rather than the landlord's supply to the tenants.
Practical tip
The supply of domestic management charges is normally exempt from VAT but there are some exceptions. Related input tax cannot therefore be recovered by the managing agent.
