HM Revenue and Customs (HMRC) has just issued revised guidance on the application of VAT to residential service charges. The guidance clarifies HMRC’s position when a Landlord is contractually required to provide services to the occupant of a property, and uses a property management company to provide the services.
Background
In 2015 the Upper Tier Tribunal (UTT) was asked to rule on the case of Ingram v Church Commissioners of England [2015] UKUT495 (LC). In this case, the Church Commissioners employed managing agents, Knight Frank LLP, to ensure their obligations under the lease were met. These services included employing a caretaker to look after the building. Knight Frank added VAT onto the payroll costs and passed the full cost onto the lessees through the service charges.
Janine Ingram challenged the VAT treatment as unreasonable claiming it was not necessary to add VAT to these services. She sought to rely on an” Extra Statutory Concession” (ESC3.18) in her defence. Under an “Extra Statutory Concession”, HMRC grants concessions to taxpayers to mitigate tax liabilities even though the relevant allowances would not be strictly allowable under tax legislation. However, the ruling of the UTT was that if the Landlord is obliged to provide services to lessees and uses a property management company to provide those services then ESC 3.18 cannot be relied upon and the supply of personnel is taxable at the standard rate of VAT of 20%.
The ruling at the time caused dismay with many observers questioning the Judge’s decision. In her defence, Janine Ingram produced correspondence from HMRC that indicated that the supply of staff came within ESC3.18 and therefore was an exempt supply for VAT purposes. The Judge dismissed this evidence as HMRC not understanding their own legislation! These circumstances and the reluctance of managing agents to uplift costs by 20% and pass them onto lessees meant that many managing agents did not change their practices and continued to treat the supply of staff as exempt from VAT.
Clarity – New guidance
On 7th September 2018 HMRC provided new guidance in the form of two notes,
- Applying the correct VAT liability on residential domestic service charges (VAT information sheet 07/18)
- Revenue and Customs brief 6 (2018): VAT exemption for all domestic service charges.
HMRC accepted that the previous guidance was confusing and badly worded. These new guidance notes put an end to the confusion once and for all. From 1 November 2018 when a Landlord uses a Managing Agent or similar body to supply staff services then VAT must be charged at the standard rate of 20% and then passed onto lessees through the service charge. The change is not retrospective and so there will be no requirement to put right any incorrect treatment pre November 2018.
Conclusion
The Association of Residential Managing Agents (ARMA) announced at last year’s Annual Conference that they were lobbying HMRC to get clarity on this issue and with good reason. It now enables ARMA to give clear guidance to all its members on the correct treatment to follow. The managing agents that followed the ruling of Ingram v Church Commissioners were clearly at a competitive disadvantage to agents that continued to believe they could rely on ESC3.18 and provide the same services for 20% less. The new guidance also removes the risk of non-compliant agents being involved in a potentially damaging and costly VAT case at some stage in the future. These agents have now dodged a bullet.
All Landlords, Managing Agents, Housing Associations and directors of Residents’ Managing Companies will now be considering their options following the guidance. VAT is usually a complex tax and Haines Watts are well placed to advise on the issues with specialist teams in place for Service Charge reporting, VAT and Property Services.
My final thought following this new guidance is for the many lessees who may now have to pay an additional 20% for caretakers, wardens and other site staff. An additional cost for what is exactly the same service. The guidance may be correct in law but it does go against public policy by potentially adding significant costs to homeowners at a time when they can least afford it.
Written by Haines Watts
