Applying the correct VAT liability on residential domestic service charges (VAT information sheet 07/18)
This information sheet tells you how to apply the correct liability to domestic service charges from 1 November 2018.
1. Overview
This information sheet, together with Revenue and Customs Brief 6 (2018), addresses the incorrect application of Extra Statutory Concession (ESC) 3.18 VAT: exemption for all domestic service charges. You also need to read the updated section 12 of Land and property (VAT Notice 742) if you are:
- a property management company
- a housing association
- a developer
- a property owner
- a landlord
- offering similar services connected with residential dwellings
You should take action from 1 November 2018 (see Revenue and Customs Brief 6 (2018)) to ensure that you:
- correctly apply the ESC 3.18
- pay the right amount of VAT to HMRC
- recover the right amount of VAT incurred on costs and overheads
2. Background
2.1 ESC 3.18 VAT: exemption for all domestic service charges
Customs and Excise Brief 03/94 introduced this concession in April 1994. Its purpose is to enable the same VAT treatment on mandatory service charges to a freehold occupant as to a leaseholder or tenant living on the same common estate. Such charges are:
- exempt from VAT when made to leaseholders or tenants as they directly link to an exempt supply of an interest in land from the landlord
- standard-rated for VAT when made to freeholders as they constitute a separate supply not linked to a supply of an interest in land
If you’re a landlord of a common area of a shared residential estate, the concession allows you to treat these mandatory charges to freeholders of property on that estate as exempt from VAT, if you so wish. But doing so, may restrict your ability to recover the tax incurred by you on your costs and overheads.
2.2. Services covered by the concession
The services covered are the:
- upkeep of the common areas of the estate, dwellings or blocks of flats where the occupants live and where these charges are mandatory for all the occupants
- provision of a warden, superintendent, caretaker or those performing a similar function connected with the day-to-day running of that estate, dwelling or blocks of flats, for those occupants
- general maintenance of the exterior of a block of flats or individual dwelling - where the residents cannot refuse this
This concession does not apply to any management fees charged by a management company, or similar, for its services.
2.3. Mrs Janine Ingram (2015) UKUT 0495(LC)
The Upper Tribunal (Lands Chamber) released a decision on 15 September 2015 confirming that the concession applies in the circumstances outlined in paragraph 2.1.
The decision also confirmed that if a landlord is contractually obliged to provide services to the occupant of a property, and uses a property management company or similar, to provide these services, the property management company cannot use the concession.
This is because the management company is providing a standard-rated supply of services to the landlord, not the occupant, even though they’re collecting payment on behalf of the landlord directly from the occupant (see sections 3 and 4).
The Upper Tribunal was content that paragraphs 12.2 and 12.4 of Land and property (VAT Notice 742), as extant at that time, were consistent with the original Customs and Excise Brief 03/94. However, it was considered that the wording could be clearer.
This information sheet and the updated section 12 of Land and property (VAT Notice 742), are intended to provide that clarity.
3. Landlords
If you’re a landlord of a residential property, you will normally be contractually obliged to provide certain services to the occupants of a property. This includes the:
- maintenance and repair of the fabric of the building and the common areas
- provision of personnel to perform functions connected with the day-to-day running of a residential estate, dwelling or blocks of flats, for all the occupants
If you provide these services because of a contractual agreement with the occupant, you can recover the costs from them in the form of a periodic service charge (which may be described as an ‘estate management charge’, ‘block management charge’ or similar).
4. Property management companies or similar
Residential landlords will usually engage a management company, or similar, to enable them to fulfil their contractual obligations to the occupant. If you are such a management company, you will deal directly with both the occupants of the building and with the landlord.
(a) Dealings with the occupants of a building by you on behalf of a landlord
Where a landlord allows you to collect periodic payments of mandatory service charges on their behalf, from the occupants of a building, the monies you collect and retain for your use, together with any payments received from the landlord are consideration for your supply of services to the landlord. This is a taxable service you provide to the landlord, so ESC 3.18 does not apply.
(b) Services you provide on behalf of the landlord
You may pay for the goods and services required by the landlord (and you may use the monies collected on behalf of the landlord from the occupants of the building to do so). You then have 2 choices:
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if you recover input tax on these goods and services which you acquire on behalf of the landlord, you should use the invoicing procedure as outlined in section 23 of the VAT guide (VAT Notice 700) and charge the same amount of tax to the landlord in the same VAT accounting period, or
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you can treat the recharge of the costs you incur on behalf of the landlord, as a disbursement providing the relevant conditions are met - for more information on disbursements, see section 25 of the VAT guide (VAT Notice 700).
5. Supply of staff
If you’re a management company, or similar, and supply staff or personnel to a landlord, (either directly or bought in from a third party), this is a taxable supply to the landlord. Only the landlord can apply ESC 3.18 if these costs are recharged to a freeholder on a common estate. You, or the third party company providing the staff, cannot use the concession.
6. Common errors
HMRC has identified the following common scenarios where people have failed to apply ESC 3.18 correctly:
(a) Property management companies, or similar treating their supply as being to the occupant, rather than the landlord
As outlined in sections 3 and 4, if you’re a management company, or similar, providing services to the landlord so that their contractual obligations to the occupants are met, then this supply is from you to the landlord and is taxable at the standard rate of VAT.
You cannot treat your supplies as VAT exempt supplies, made to the occupant. So ESC 3.18 does not apply.
This type of error usually arises because management companies wrongly assume that as they’re collecting periodic payments directly from the occupant, they must be making their supply to the occupant and not the landlord. However, the monies collected are contractual payments due to the landlord for their supply.
Any collected monies kept by management companies, or similar, and not used to meet the contractual obligations of the landlord, will be payment for the services provided by the management company, for acting on behalf of the landlord. These services are taxable at the standard rate of VAT.
(b) Not recharging costs borne on behalf of the landlord back to the landlord
As outlined in section 4(b), If you’re a management company, or similar, and bear the initial cost of the goods or services acquired on behalf of the landlord, you can recover these costs from the landlord.
Some management companies however, are recovering input tax on bought-in supplies and then recharging them directly to the occupant exempt from VAT. They have been relying on ESC 3.18 to do so and this has led to their fees also being incorrectly treated as exempt.
(c) Supply of staff
As outlined at section 5, the recharge of staff or personnel costs by a management company, or similar, is a taxable supply to the landlord. In some cases, management companies have wrongly relied on ESC 3.18 to recharge staff or personnel costs direct to the occupant, exempt from VAT.
7. Action to take
If you’re a property management company, or similar, who supplies goods and services to landlords and have incorrectly applied or relied on ESC 3.18, you must take action for the following:
(a) Incorrect application of ESC 3.18
If you have supplied goods and services in situations where ESC 3.18 does not apply, you must correctly account for VAT from 1 November 2018, (see Revenue and Customs Brief 6 (2018)).
If you invoice or pay for your services on or after 1 November 2018, you must account for VAT, as indicated. If prepayment of your invoices covers services to be performed both before and after 1 November 2018, you’ll need to apportion them.
The content of Revenue and Customs Brief 6 (2018), this information sheet 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.
(b) Errors not resulting from misuse of ESC 3.18
If you have made any other errors in accounting for your supplies of goods or services that do not involve the incorrect application of ESC 3.18, you must correct these in accordance with the normal rules. See VAT Notice 700/45: how to correct VAT errors and make adjustments or claims.
8. Further information
For further information:
- see paragraph 3.18 of VAT Notice 48: Extra Statutory Concessions
- see updated section 12 of Land and property (VAT Notice 742)
- contact the VAT: general enquiries helpline