Landlord and tenant – Service charge – VAT – Appellant lessee seeking determination of reasonableness of service charges levied by respondent landlords – First-tier tribunal rejecting appellant’s challenge to amount of charge – Whether appellant liable to pay sums charged to respondents by managing agent as VAT on fees for human resources and salaries – Whether such payments falling within VAT exemption in para 3.18 of VAT Notice 48 – Appeal dismissed
The appellant was the lessee of a flat in London W2 on a long lease from the respondents as freeholders of the building. She applied to the first-tier tribunal (FTT), under section 27A of the Landlord and Tenant Act 1985, to determine the reasonableness of service charges levied by the respondents for three years spanning 2010 to 2014, so far as they included VAT on certain items charged by the respondents’ managing agent in respect of the management services which it provided. The appellant disputed her liability for VAT charged by the managing agent to the respondent on fees for salaries and human resources services in respect of all staff employed for the building.
The appellant did not dispute that the fees and salaries in question were properly recoverable as service charges under the terms of the lease. However, she argued that, as a matter of law, the respondents were not obliged to pay VAT on those items, with the result that the VAT element was unreasonably incurred for the purposes of section 19 of the 1985 Act and should not be passed on to the lessees in the building. The issue turned on whether the VAT fell within an extra-statutory concession set out in para 3.18 of VAT Notice 48, by which an exemption from VTA was granted on “all mandatory service charges or similar charges paid by the occupants of residential property towards the upkeep of the dwellings or block of flats in which they reside and towards the provision of a warden, caretakers and people performing a similar function for those occupants”.
The FTT held that the concession did not apply to the disputed items and rejected the appellant’s challenge accordingly. The appellant appealed.
Held: The claim/appeal was allowed/dismissed.
The extra-statutory concession in para 3.18 of VAT Notice 48 remedied the anomaly which had previously existed whereby residential occupiers who had to pay a service charge to someone other than the person who supplied their accommodation were obliged to pay VAT on the service charge, whereas no VAT was payable on mandatory service charges paid to the landlord. Charges payable to a person who did not supply the accommodation could not be said to be part of the consideration for the supply of the accommodation, and consequently did not attract the exemption which applied to charges paid to the landlord, under Group 1 of Part II of Schedule 9 to the Value Added Tax Act 1994, as rent payable in respect of a letting of property. The concession removed that disparity in VAT treatment by exempting the occupier from VAT on mandatory service charges payable to someone other than the supplier of the accommodation.
The concession did not apply to the disputed charges in the instant case. Even assuming that all the disputed charges related to provision of a warden, caretakers and people performing a similar function, so as to satisfy the last part of the concession, none of them were mandatory service charges paid by the appellant as required by the first part. The mandatory service charges which the appellant paid were those invoiced to her by the managing agent on behalf of the respondents. The concession was irrelevant to those charges because these they were charges in the nature of rent owed to the supplier of the accommodation and were exempt from VAT in any event.
By contrast, the charges which the appellant was disputing were sums paid by the respondents to the managing agent for the provision of services supplied to the respondents; they were sums paid by the lessor to a third party for the provision of services by the third party to the lessor. The position with such charges was the same as with any other services supplied to the respondents to enable them to fulfil their obligations under the lease, such as the provision of cleaning and maintenance for the building. The concession did not apply to any charges paid by the landlord to third parties for the supply of services, even if the cost of those services was passed on to a residential occupier through a service charge. The fact that charges for those services were passed on to the lessees as service charges did not convert sums paid by the lessor to third parties into mandatory service charges paid by the lessees. The purpose of the concession was to deal with a minor gap or anomaly in VAT liability, or hardship of at the margins, and was not intended to apply so as to exempt large numbers of suppliers of services who normally paid VAT from an obligation to do so when the charges were passed on to residential occupiers as service charges: R v Inland Revenue Commissioners, ex parte Wilkinson [2005] UKHL 30 considered.
It made no difference that the managing agent could easily invoice the lessees directly instead of billing the respondent landlord. The concession applied only to service charges which were mandatory. Any charges made by a third party to a lessee in those circumstances would not be mandatory because there was no contractual relationship between the lessee and the third party supplier. The lessee was under no legal obligation to pay the third party supplier, as opposed to the lessor. Similarly, the concession did not apply to optional services supplied to a residential occupier by a landlord, managing agent or anyone else.
Martin Reiss represented the appellant; Edwin Johnson QC (instructed by Charles Russell Speechlys) appeared for the respondents.
Sally Dobson, barrister
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