Out-Law / Your Daily Need-To-Know

Tax tribunal asks ECJ to consider whether service charges should be considered separately from property rent

24 Aug 2011, 4:43 pm

The First Tier of the Tax Tribunal has asked the European Court of Justice (ECJ) to consider whether a service charge for cleaning and maintenance as part of a lease should be subject to VAT even if the rent in respect of the lease is exempt from VAT.

The answer could mean that landlords will have to start charging VAT on any such service charges said Catherine Robins, a tax expert with Pinsent Masons, the law firm behind Out-Law.com.

Field Fisher Waterhouse, a firm of solicitors, claims that the service charge should be treated separately to its rental of its London offices so that it can claim back VAT on the service charge even though the rent is exempt from VAT.

Property leases are generally treated as 'exempt supplies' for VAT purposes. However landlords can 'opt' to charge VAT on commercial rents, allowing business tenants to claim back the VAT they have paid.

Field Fisher Waterhouse's landlord's service charge covers the repair, cleaning and decorating of exterior and common parts of the offices, as well as the maintenance of heating and air conditioning used throughout the building, according to the referral (20-page / 407KB PDF).

Although invoiced separately, the charge is considered as part of the 'rents' on the property and the results of non-payment can include termination of the lease.

However the firm claims that the services provided are "unconnected to letting", and to a significant extent concern "the common parts of the building" rather than its own offices.

The ECJ decided that cleaning services provided by a landlord to common areas of a property in shared occupation should be considered a separate supply for VAT purposes in 2007, in a case involving Czech property management company Tellmer Property.

However HM Revenue and Customs (HMRC) distinguished the verdict from UK service charges, which are generally charged as a condition of a lease agreement.

"Until now the Tellmer case has been quietly ignored by HMRC on the basis that it is not relevant to the way service charges are usually structured under leases in the UK. Landlords who have not opted to tax will now be concerned that this referral of the issue to the ECJ may mean - depending on its decision - that they will have to start charging VAT in respect of service charges," said Catherine Robins.

"VAT exempt tenants will also be concerned if the ECJ rules that VAT must be charged in respect of all service charges as that VAT will not be recoverable and will increase their overheads," she said.