Question 1

Vexed by VAT

Accepted Answer

Q: The problem was that for the first five or six years of the development we were VAT exempt because our service charges were paid direct to the developer. That at least is clear in all VAT related searches. Now the developer (not us) has sold most of the properties and handed over control to a management company, and although WE have no contract with them and were not involved in the handing over of the running of the development, we are now being charged VAT by this management company on everything. The ground rent and property insurance is still payable to the developer. The management company collect the money for those, but we don't think there is VAT on that although it is not clear and we are questioning it. We are now being handed a bill for an extra £100 a month because we have 24/7 porters, a manager, maintenance man and public area cleaners who used to work for the developer but who are now employed by the management company. We are being charged VAT on their wages. Why should pensioners suffer because the company hands over day to day running of their complex to an outside agency? We were not given the opportunity to run the complex ourselves even though there are a good number of very qualified residents who have run major businesses or - in my case - been the chairman of a board of directors of a management company run by residents. FPRA Hon Consultant Gordon Whelan replies: VAT is a complex tax, but I will try to summarise the situation for you. Under an Extra Statutory Concession (ESC3.18) issued in 1994 domestic service charges are exempt from VAT. So for VAT purposes all payments made by a leaseholder under the terms of a lease with a landlord are exempt from VAT. In November of last year, HMRC issued new guidance on this matter. This stated that the exemption to VAT would not apply when the landlord appoints a managing agent to provide services to leaseholders. This is the case when a managing agent employs staff (eg concierge, porters and cleaners) to deliver the services required under the lease. The cost of providing the services is subject to VAT at the standard rate of 20 per cent. This is the position you now find yourselves in and your managing agent is only following the recent guidance issued by HMRC. The guidance issued by HMRC last year has surprised many tax practitioners and there is some criticism of HMRC’s stance and interpretation of the legislation but for time being this is the VAT position. VAT can often depend on the exact circumstances of the parties concerned and so this summary should only be taken as a general guide. [Submitted January 2020]

Question 2

Vexed by VAT

Accepted Answer

Q: The problem was that for the first five or six years of the development we were VAT exempt because our service charges were paid direct to the developer. That at least is clear in all VAT related searches. Now the developer (not us) has sold most of the properties and handed over control to a management company, and although WE have no contract with them and were not involved in the handing over of the running of the development, we are now being charged VAT by this management company on everything. The ground rent and property insurance is still payable to the developer. The management company collect the money for those, but we don't think there is VAT on that although it is not clear and we are questioning it. We are now being handed a bill for an extra £100 a month because we have 24/7 porters, a manager, maintenance man and public area cleaners who used to work for the developer but who are now employed by the management company. We are being charged VAT on their wages. Why should pensioners suffer because the company hands over day to day running of their complex to an outside agency? We were not given the opportunity to run the complex ourselves even though there are a good number of very qualified residents who have run major businesses or - in my case - been the chairman of a board of directors of a management company run by residents. FPRA Hon Consultant Gordon Whelan replies: VAT is a complex tax, but I will try to summarise the situation for you. Under an Extra Statutory Concession (ESC3.18) issued in 1994 domestic service charges are exempt from VAT. So for VAT purposes all payments made by a leaseholder under the terms of a lease with a landlord are exempt from VAT. In November of last year, HMRC issued new guidance on this matter. This stated that the exemption to VAT would not apply when the landlord appoints a managing agent to provide services to leaseholders. This is the case when a managing agent employs staff (eg concierge, porters and cleaners) to deliver the services required under the lease. The cost of providing the services is subject to VAT at the standard rate of 20 per cent. This is the position you now find yourselves in and your managing agent is only following the recent guidance issued by HMRC. The guidance issued by HMRC last year has surprised many tax practitioners and there is some criticism of HMRC’s stance and interpretation of the legislation but for time being this is the VAT position. VAT can often depend on the exact circumstances of the parties concerned and so this summary should only be taken as a general guide. [Submitted January 2020]

Vexed by VAT

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