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Change to VAT on service charges

From 1 November 2018 property service companies will no longer be able to use HMRC’s concession to exempt certain types of supply. As a landlord how might this affect you?

Service charges. If as a landlord you’re responsible for the upkeep of common areas, e.g. hallways, gardens, drives, etc., of a building or an estate which contains more than one dwelling, e.g. a block of flats, you’ll probably add a service charge to rents to cover your costs. HMRC’s view is that the services you provide are part of the charge for letting the properties. As letting residential accommodation is exempt so is the service charges you levy. HMRC says that in some situations the exemption is being misapplied.

HMRC’s concession. HMRC has issued a statement clarifying when a service charge is exempt and when it’s not (If the common areas you’re responsible for maintaining also include dwellings owned by freeholders, you can exempt the service charge to your tenants but should apply standard rate VAT to that for the freeholders. However, HMRC applies a concession that means you can also exempt the service charge for the freeholders. If you use the concession to exempt service charges you aren’t entitled or may need to restrict the VAT you reclaim on related costs.