VAT, Service Charges & Ground Rent

Fire_Fox

Is anyone else charged VAT on service charges and ground rent? I have just had a very interesting chat with HMRC who advised residential properties are exempt. :j Waters slightly muddied by the fact that the block was converted from offices and we have three shops downstairs which were sold off separately to the residential portion last year. We presumably all contribute to the ground rent, but do not share any internal accommodation and are billed for service charges separately.

Our current landlord is not VAT registered (charging us VAT on both), our previous one was (VAT on service charges but not ground rent). Interestingly our previous landlord only dealt with commercial property other than us, the incumbent is new to the game so it's feasible there has been an error somewhere. Fingers crossed ...

Be interested to hear from any leaseholder who does or does not have commercial property on site and is or is not charged VAT, or anyone who knows about this stuff!

theartfullodger

Our current landlord is not VAT registered (charging us VAT on both)

Hmmmnnn.. interesting, I thought charging VAT if not registered for VAT was called fraud... in your shoes I'd ask HMRC's view on that,...

Might be worth asking the question over on LLZ under
tax questions..
http://www.landlordzone.co.uk/forums/forumdisplay.php?f=7

'appy new year foxy....

Cheers!

Lodger

clutton_2

i have never been charged VAT on my ground rents - but no commercial property

Fire_Fox

Thanks to you both! I'm getting the distinct impression this lot are making it up as they go along ... reminiscent of their predecessors. HMRC pointed me to this:

"12.1 The basic position

Service charges relating to the upkeep of common areas of an estate of dwellings, or the common areas of a multi-occupied dwelling, are exempt from VAT so long as:

• they are required to be paid by the leaseholder or tenant to the landlord under the terms of the lease or tenancy agreement.

This is because the service charge is treated as ancillary to the main supply of exempt domestic accommodation.

12.4 What if a managing agent provides services to occupants on behalf of a landlord?

A managing agent acting on behalf of a landlord can treat the mandatory service charges to occupants as exempt, providing the agent invoices and collects the service charges directly from the occupants. However, any management fee collected from the occupants is standard-rated because it relates to the managing agent’s supply to the landlord."
http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&id=HMCE_CL_000154&propertyType=document#P407_51067


I also found the following, but am not clear if this relates to all VAT transactions, including ground rent and service charges:

"When residential is zero-rated. If a property is 'zero rated', it means it is registered for VAT - so the owner can recover VAT on his expenses - but the VAT rate is 0% - so he doesn't have to charge VAT to tenants or buyers. Who says there is no such thing as a fee lunch - and from the Revenue as well! Residential property will be zero rated for VAT, rather than exempt, if any of the following apply,

• it has been empty for 10 years or more and recently been renovated, or
• it has just been converted from a non residential building, or
• it is a protected building and has undergone a substantial re-construction.

Mixed use properties. When a building contains residential and non-residential elements, there will be an apportionment between the zero-rated and non-zero-rated elements of the building. So in the case of a shop with a residential flat above, the flat may be zero-rated, but the shop will be either exempt or standard rated."

http://www.smithfieldcommercial.co.uk/renting/vat.htm

ArtfulLodger: I don't think I am being charged VAT as such, as the extra charge is not called VAT on my invoice, there is simply no explanation of why the total has gone up by 17.5%. As freeholder they can pass any and all costs incurred in managing the property onto us leaseholders, quite what the proper way of doing so with VAT is, I have no idea. I have remembered that I have a contact who is both an accountant and a leaseholder himself, so he is in reserve if I get no joy from the freeholder!

kalaika

You also need to consider the terms of your lease. For example, if you have agreed to pay, say, £50 a month for service charges, then that is what you pay regardless of whether this includes VAT or not. Whereas if your agreement says you pay, say, £42.55 plus VAT where applicable (= £50) then it will be important whether or not VAT applies in your case.

If the former situation is true, then your landlord raising VAT invoices that he is not entitled to may show his inexperience and potentially could have an large impact on him but does not have any impact on you as the amount you pay is the same regardless of VAT status.

If the latter is true, then, as you are doing, it is important to find out whether the VAT should be charged or not, but I'm afraid I can't help with that.

JasonLVC

Fire_Fox wrote: »

Is anyone else charged VAT on service charges and ground rent? I have just had a very interesting chat with HMRC who advised residential properties are exempt. :j Waters slightly muddied by the fact that the block was converted from offices and we have three shops downstairs which were sold off separately to the residential portion last year. We presumably all contribute to the ground rent, but do not share any internal accommodation and are billed for service charges separately.

Our current landlord is not VAT registered (charging us VAT on both), our previous one was (VAT on service charges but not ground rent). Interestingly our previous landlord only dealt with commercial property other than us, the incumbent is new to the game so it's feasible there has been an error somewhere. Fingers crossed ...

Be interested to hear from any leaseholder who does or does not have commercial property on site and is or is not charged VAT, or anyone who knows about this stuff!

You kind of answered your own question with your other post that quotes the HMRC guidance on the subject.

Service charges/ground rent are indeed exempt from VAT in relation to a redsidential property (but can be subject to VAT if they are commercial properties).

Your new landlord cannot charge VAT unless they are VAT registered and the invoice/bill they issue you MUST have a VAT number shown. If no VAT number is shown and you are 100% sure they are not VAT registered, then you should take this up straight with them as this is costing you money. Maybe they've just increased your rent without telling you or 'extra' costs for something.

Fire_Fox

kalaika wrote: »

You also need to consider the terms of your lease. For example, if you have agreed to pay, say, £50 a month for service charges, then that is what you pay regardless of whether this includes VAT or not. Whereas if your agreement says you pay, say, £42.55 plus VAT where applicable (= £50) then it will be important whether or not VAT applies in your case.

If the former situation is true, then your landlord raising VAT invoices that he is not entitled to may show his inexperience and potentially could have an large impact on him but does not have any impact on you as the amount you pay is the same regardless of VAT status.

If the latter is true, then, as you are doing, it is important to find out whether the VAT should be charged or not, but I'm afraid I can't help with that.

Thanks for your reply. In terms of ground rent the long lease simply states £150, no mention of VAT, but later in the document there is a clause which allows for VAT to be charged. IIRC the amount of service charges is not defined, simply what services are included in the charge.

The implications of an error having been made are large, we have been charged VAT on service charges for the last five years! :eek: No idea if we can claim back any money charged in error .... it's especially complicated given that we changed landlord/ management company six months ago.

JasonLVC wrote: »

You kind of answered your own question with your other post that quotes the HMRC guidance on the subject.

Service charges/ground rent are indeed exempt from VAT in relation to a redsidential property (but can be subject to VAT if they are commercial properties).

Your new landlord cannot charge VAT unless they are VAT registered and the invoice/bill they issue you MUST have a VAT number shown. If no VAT number is shown and you are 100% sure they are not VAT registered, then you should take this up straight with them as this is costing you money. Maybe they've just increased your rent without telling you or 'extra' costs for something.

Thank you for your reply. Our new landlord/ management company confirmed to me on the telephone that they are not VAT registered, are charged VAT by the council, hence passing the cost onto the leaseholders. The additional charge is NOT listed as VAT on the invoice, it simply states something like "ground rent £176.25" whereas previously we were charged £150.

JasonLVC

Fire_Fox wrote: »

Thanks for your reply. In terms of ground rent the long lease simply states £150, no mention of VAT, but later in the document there is a clause which allows for VAT to be charged. IIRC the amount of service charges is not defined, simply what services are included in the charge.

The implications of an error having been made are large, we have been charged VAT on service charges for the last five years! :eek: No idea if we can claim back any money charged in error .... it's especially complicated given that we changed landlord/ management company six months ago.



Thank you for your reply. Our new landlord/ management company confirmed to me on the telephone that they are not VAT registered, are charged VAT by the council, hence passing the cost onto the leaseholders. The additional charge is NOT listed as VAT on the invoice, it simply states something like "ground rent £176.25" whereas previously we were charged £150.

What are the Council charging the landlord for then that involves VAT?.

A statutory service provided by the Council, say bin collection, road gritting, etc are all outside the scope of VAT.

It is entirely possible that there are some services provided by the council that IS subject to VAT (rent for a lock-up garage say) - but cannot think why the landlord would call this or include it within the 'ground rent'.

If the council are charging VAT for something, then it is fair for the landlord to pass that cost onto you (as the landlord will be unable to reclaim this VAT themselves), but what is this "service" that your new landlord is receiving from the Council that your old landlord was not receiving (after allm your old landlord didn't charge it onto you did they?..(ie, if nothing has changed why has the cost gone up by 17.5%?.)

Fire_Fox

JasonLVC wrote: »

What are the Council charging the landlord for then that involves VAT?.

A statutory service provided by the Council, say bin collection, road gritting, etc are all outside the scope of VAT.

It is entirely possible that there are some services provided by the council that IS subject to VAT (rent for a lock-up garage say) - but cannot think why the landlord would call this or include it within the 'ground rent'.

If the council are charging VAT for something, then it is fair for the landlord to pass that cost onto you (as the landlord will be unable to reclaim this VAT themselves), but what is this "service" that your new landlord is receiving from the Council that your old landlord was not receiving (after allm your old landlord didn't charge it onto you did they?..(ie, if nothing has changed why has the cost gone up by 17.5%?.)

AFAIK the council are not providing any services to us, the services are all provided by the management company or their contractors. Services we pay for include lift maintenance, maintenance of fire services, electricity for communal areas, cleaning and window cleaning (:rotfl:), repairs and redecoration (:rotfl:), replacing lightbulbs, their time organising all this and collecting our money ...

I have no idea whatsoever how running a business works, and even less about what VAT is actually a tax on and who pays what to whom. I've just written an essay trying to explain how I think it works and tied myself in a knot, I do not understand any of it basically! Don't all businesses pay VAT on their income or profits unless a specific service is exempt???

According to HMRC, VAT at 17.5% is due on service charges to holiday homes and commercial property. My guess is that our block is still listed as an office block so the council are erroneously charging VAT to the management company. Neither the old nor new freeholder/ management company has any experience with residential developments barring ours, hence the management being a pig's ear from start to finish! :rolleyes:

clutton_2

i think you should talk to the HMRC about this management company and get some clarity from them as to whether they ARE registered for VAT or not... if they are not then they cannot charge you VAT - whether this information comes within the remit of the darned Data Obstruction Act i dont know... but worth asking...

Only companies which have a turnover of more than £56k (?) per year can register for VAT - so that small companies dont get to do all that luvverly paperwork

"""are charged VAT by the council""" - what for ??

if your invoice does not specify VAT then they are not charging it - but they have increased your management charges by 17.5% !!

Fire_Fox

"Are charged VAT by the council" I don't know and it's not often I admit that!! That is what the management company told me and I took it as red, as I know ZILCH about tax. Oh dear oh dear, I thought my dispute-with-the-management days were behind me once we ousted the crooks .... I have been playing nicely and paying my charges for seven entire months. :rolleyes:

Will keep you informed of developments!