HMRC has recently issued a brief concerning VAT exemption for domestic service charges. Deloitte explains the detail.
The exemption, extra-statutory concession 3.18 (the “Concession”), is explained in Revenue and Customs Brief 6 2018. This brief explains HMRC's policy on the changes to the VAT exemption of all domestic service charges from 1 November 2018. The new VAT Information Sheet (07/18) has also been issued and HMRC have updated paragraph 12 of VAT Notice 742 on Land and Property.
It is recommended that the arrangements with property management companies, and those involving management by/for other landlords are reviewed to determine whether any additional VAT costs or compliance burden will be required going forward. The critical factor in determining the appropriate VAT treatment will be the nature of the contractual arrangements between the housing association and the management company (and if applicable, the tenant/leaseholder).
The Concession allows a landlord of a common area of a shared residential estate to treat mandatory charges to freehold owners of dwellings on that estate as exempt from VAT. HMRC therefore accepts that domestic service charges paid by tenants to their landlord are exempt from VAT. This is because the service charge is treated as ancillary to the main supply of domestic accommodation (exempt from VAT).
However, where similar services are supplied to freehold owners of dwellings (for example, housing associations), such services would be standard-rated for VAT purposes because there is no supply of domestic accommodation to link those services to. Whilst property management companies may collect services charges from the occupier on behalf of the housing association, the property management company’s services are nevertheless provided to the housing association, rather than the occupier, and therefore the service does not benefit from the Concession.
HMRC considers that some property management companies (and similar) have incorrectly applied the Concession. Going forward, they should correctly account for VAT from 1 November 2018. This is also relevant to housing associations who manage properties for other landlords and have not been charging VAT.
Please note that there is no requirement for retrospective adjustments to be made so VAT should only be charged in circumstances falling outside of the Concession from 1 November 2018.