A new Revenue and Customs Brief (6-2018) entitled VAT exemption for all domestic service charges has recently been published by HMRC. The brief explains changes to the Extra Statutory Concession (ESC) 3.18 VAT: exemption for all domestic service charges may be applied. The ESC was introduced in February 1994 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.
In the Brief, HMRC identified a number of scenarios where ESC 3.18 has been applied incorrectly. This in part followed a decision by the Upper Tribunal that confirmed 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 means that the concession does not apply to management fees charged by a management company, accordingly, their fees will be taxable at the standard rate of VAT.
HMRC is reminding all property management companies, and companies supplying similar goods and services in similar situations, who have not correctly applied ESC 3.18, that since 1 November 2018, they must correctly account for VAT. VAT information sheet 07/18 provides further guidance on this subject. Property management companies must ensure that the right amount of VAT incurred on costs and overheads is recovered.
Residents affected by these changes could see an increase in their service charges of between say 10% to 20%. The actual amounts involved will depend on the VAT status of individual managing companies. Management companies taking care of small developments should not be affected.