VAT & domestic service charges – are you exposed?

Published on 10 September 2018

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On 7 September 2018 HMRC issued a business brief and information sheet in relation to the VAT position on domestic service charges.

Who is this relevant to?

  • Domestic landlords who use managing agents
  • Managing agents

What is the issue?

Domestic service charges are exempt from VAT when provided to a tenant or leaseholder by a landlord but standard rated when provided to a freeholder (because there is no landlord/ tenant relationship). In 1994, to create parity, HMRC introduced a concession so that mandatory service charges could be exempt from VAT even where there was no landlord/ tenant relationship. Most property companies utilise the concession.

HMRC advises that it is aware that where the service charges are provided through a management company the concession is being used incorrectly in some cases with charges being treated as exempt from VAT when, in fact, they should, in HMRC’s opinion, be subject to VAT.

The business brief and information sheet are designed to clarify HMRC’s position but it is clear they will be looking to challenge arrangements if they consider the concession does not apply.

What should you do?

  • For managing agents it is important to review the arrangements to ensure that they are charging and accounting for the correct amount of VAT. If not there is a risk of additional VAT due to HMRC plus the threat of penalty action.
  • For landlords, as the rent is exempt from VAT, any VAT incurred is a cost to them. It is important therefore to understand the correct VAT treatment to prevent any nasty VAT bills.

If you have any concerns about your VAT treatment of domestic service charges you should consult a specialist.

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Kreston Reeves has a specialist VAT team that can help. For further information on the above, please speak with Rupert Moyle or Colin Laidlaw using the contact details here.

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