VAT Treatment of Residential Service Charges

Residential Service Charges

Many occupants of residential property are required to pay service charges in respect of shared costs for the estate or building in which they live. It is common for the person responsible for managing and collecting these service charges to outsource it to a property management company. HMRC has recently published updated guidance in respect of services provided by property management companies to the occupants of residential property.

Service charges payable by the holder of a residential lease or tenancy are usually exempt from VAT as they are consideration for the exempt use of land. The same treatment does not technically apply to service charges payable by a freeholder, therefore there is a long-standing concession which applies the same treatment. The concession was designed to put all occupants of residential property in the same position from a VAT perspective, that service charges in respect of shared costs would be exempt.

HMRC has identified that the concession has been wrongly applied in some circumstances, namely supplies made by certain property management companies. It is common for landlords to contract a third-party, such as a property management company, to supply the goods and services they are required to provide to the occupant of the property. Certain property management companies have been incorrectly applying the concession and have exempted the supply of their services. Such supplies cannot fall within the concession as they are made to the landlord, not the occupant. Furthermore, the supplies cannot be exempted as a supply of land, as the property management company is not the landlord.

HMRC have confirmed that from 1 November 2018, all property management companies or similar must start accounting for VAT correctly where they may have previously relied on the concession. HMRC are not requiring companies to make adjustments for previous supplies that may have been accounted for incorrectly due to reliance on the concession.

Any property management company that has been exempting any element of their services should consider the impact of these changes. More information can be found in the VAT information sheet 7/2018 and Revenue & Customs Brief 6 (2018).

If you would like to discuss any of the issues raised in more detail or if you would like to speak with a member of our Construction & Real Estate team, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with your local representative.

This article featured in issue 11 of our construction and real estate newsletter series. Read the full newsletter here: Real Estate Matters – Issue 11