The UK views services supplied by landlords for the upkeep of the common parts of buildings in multiple occupation, and of large estates, as ancillary to the rent. Consequently, the VAT treatment of service charges usually follows the VAT treatment of the rent.
This means that the service charge will not be subject to VAT (unless the landlord has opted to tax). As a result, tenants will have to bear the gross cost of the services provided and will be unable to recover any VAT passed on through the service charge.
However, the ruling of the European Court of Justice (ECJ) in Tellmer Property [2009] PLSCS 180 suggested that it might be possible to treat a property rental and the provision of services as separate supplies. The decision prompted a further reference to the European Court for clarification of the position: Field Fisher Waterhouse LLP v Commissioners of HM Revenue and Customs [2012] PLSCS 191.
The case concerned a lease of offices in London. The landlord had reserved a service charge to cover the supply of heat and water to the building, repairs to structure and machinery, cleaning in the common parts and security. The tenant tried to reclaim VAT on the service charge from HMRC, even though its rent was exempt from VAT, on the ground that the landlord was making separate and independent supplies which should be separately assessed for liability to VAT.
The European Court has referred the case back to the tax tribunal to decide whether, in the light of the guidance set out in its judgment and on the facts of this particular case, the transactions in question were so closely linked that they constituted a single supply for VAT purposes. Consequently, the case is still live. However, the court strongly hinted that services provided to an average tenant of commercial property to enhance the enjoyment of premises should be viewed as part of a single indivisible supply of land, as opposed to a separate taxable supply.
The court agreed that the fact that the landlord had a right to terminate the lease for non-payment of the service charge supported the view that the landlord was making a single supply – but said that this is not necessarily decisive when assessing whether there is, in fact, such a supply.
The fact that the services provided could, theoretically, be supplied by someone who is not the landlord is not decisive either – and does not mean that the services cannot be treated as part of a composite supply. However, if a lease were to provide for a supply of services that are independent of, and have only an artificial link to, the principal supply, it would then be possible to treat the supply of land and the supply of services as distinct and separate supplies.
The court’s answers to the questions put to it confirm that it is possible to treat a lease of land and services provided to a tenant as a single exempt supply and appear to vindicate HMRC’s current position.
Allyson Colby
Property law consultant