HMRC clarifies VAT rules on domestic service charges for landlords

HMRC has published updated guidance for property management companies and others clarifying the VAT exemption for domestic service charges and what to do if it has been wrongly applied.

The extra statutory concession (ESC) 3.18 for the VAT exemption for all domestic service charges was introduced in April 1994 and applies only when 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. Leaseholders and tenants are exempt from paying VAT on these charges as the charge is directly linked to an exempt supply of an interest in land. Freeholders do not have this link, so for them, these charges are normally taxable at the standard rate of VAT.

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.

Landlords often use property management companies or companies offering similar services, to fulfil their legal obligations to the occupants of an estate.

The property management company obtains 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.

HMRC says it knows 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 cannot use the concession to treat their supplies as if made to the occupant rather than the landlord, or to recharge costs borne on behalf of the landlord, back to the landlord, or to 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, which have not correctly applied ESC 3.18, must correctly account for VAT.

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