How the Change to VAT on service charges affects Landlords

From 1st 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.

Trap: 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.

Maintenance trouble

If you contract out the upkeep of common areas to a property maintenance firm, it cannot use the concession to VAT exempt its services to you. In fact, in any situation where a maintenance firm does work for you, it should not VAT exempt its charges, but typically this is what happens. HMRC’s recent statement says this must stop from 1st November 2018. Therefore, as a landlord you could see a change to the way you are invoiced by property maintenance companies and your bill may go up. If so you will need to increase the service charge to make sure you’re not out of pocket.

To summarize, if you use a property maintenance company to upkeep common areas of your property, the way they invoice you from 1st November may change. This could cost you more. If so, consider increasing charges to your tenants.

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