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10th October 2018

Changes to VAT on service charges

There have been changes to VAT on service charges

HMRC has announced important changes to VAT on service charges.

changes 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?

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, a block of flats for example, 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 are any service charges you levy.

But HMRC says that in some situations, the exemption is being misapplied.

HMRC has issued a statement clarifying when VAT on 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.  

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.

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 1 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.

Got any questions? Get in touch and we’ll give you the advice you need. You can even schedule a call with one of our experts.

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