HMRC Clarifies VAT Treatment Of Property Service Charges

by Robin Pilgrim, LawAndTax-News.com, London

02 November 2009

HM Revenue and Customs (HMRC), the UK tax authority, has announced that the UK's current treatment of property service changes for the purposes of value-added tax (VAT) is unchanged following a European Court of Justice (ECJ) decision.

The issue relates to the Tellmer case, which was brought before the ECJ to determine whether the leasing of apartments and the related cleaning of the common parts of the apartment building formed a single exempt supply by the landlord.

In this case, the landlord, named Tellmer, argued against the Czech authorities that the cleaning services amounted to a separate taxable supply. The ECJ agreed that in the circumstances outlined in the Tellmer case, the cleaning services could be separated from the property rental as a separate taxable supply.

In reaching its judgment, the ECJ concluded that two separate supplies were made rather than a single indivisible supply, because the tenants in the Czech Republic were not required to clean the common parts of the property, but had an option to ask their landlord to perform the cleaning of the common areas for an additional payment, or to obtain those services themselves from a third party.

In a brief issued on October 27, HMRC stated that if there is a requirement for service charges to be paid but the services are either provided by a different person to the lessor (or his agent) or they do not arise as a condition under the lease agreement, then HMRC's policy "continues to be that these services are a separate supply from the lease".

However, under certain circumstances, they can be treated as exempt by concession, the department stated.

"It is clear from the decision of the ECJ that Tellmer itself provided both the property leasing and the cleaning services to the tenants. However, the tenants had the choice of making an independent contract with a third party to provide the cleaning services. In the particular circumstances the court did not consider that the cleaning services were ancillary to the property letting and, as a result, concluded that they constituted a separate supply," the brief explained.

"On this basis, since the UK only treats leasing of property and related service charges as a single supply, where the services are provided by the lessor (or his agent) as a condition under the lease agreement, HMRC considers that the findings in Tellmer are consistent with existing UK policy," the brief concluded.

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