Policy paper

Revenue and Customs Brief 6 (2018): VAT exemption for all domestic service charges

Published 7 September 2018

1. Purpose

This brief, along with VAT information sheet 07/18, explains:

• when the Extra Statutory Concession (ESC) 3.18 VAT: exemption for all domestic service charges may be applied
• what property management and similar companies must do if they have wrongly applied the concession and, as a result, not declared the correct amount of VAT due, or recovered an incorrect amount of input tax

2. Readership

Anyone seeking to rely on ESC 3.18 and anyone that is affected by someone who relies on it. This includes:

• property management companies
• housing associations
• developers
• property owners
• landlords
• anyone offering similar services connected with residential dwellings

3. Background

Customs and Excise Brief 03/94 issued February 1994 introduced ESC 3.18. The concession 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.

The concession came into effect from 1 April 1994. 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.

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.

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.

The Upper Tribunal (Lands Chamber) decision of 15 September 2015 in the case of Mrs Janine Ingram (2015) UKUT 0495(LC) confirmed HMRC’s view of how the concession operates.

HMRC 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
• recharge costs borne on behalf of the landlord, back to the landlord
• recharge staff or personnel costs to the landlord

4. Action needed

From 1 November 2018, all property management companies, and companies supplying similar goods and services in similar situations, who have not correctly applied ESC 3.18, must correctly account for VAT, as explained in VAT information sheet 07/18.

The content of this brief, VAT information sheet 07/18 and updated section 12 of Land and property (VAT Notice 742) cancels and replaces any guidance or advice that HMRC has previously provided on this subject.

5. Further information

VAT information sheet 07/18 provides guidance on:

• applying ESC 3.18 on or after 1 November 2018
• the direction of a supply made by the various parties and the relevant liability of that supply
• common scenarios that arise when you apply ESC 3.18

See updated section 12 of Land and property (VAT Notice 742) for further guidance.

If you require further help contact the VAT: general enquiries helpline.