VAT on residential service charges

The July/August issue of the CPI Update reported on the ECJ case of RLRE Tellmer Property (Case C-572/07) in which the ECJ suggested that payment for the cost of cleaning the common parts of a residential block was not part and parcel of the cost of the supply of land interests to tenants, but should be treated for VAT purposes as a separate VATable supply.

In relation to residential leases, paragraph 12.1 of VAT Notice 742 has always stated that: “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.” We commented at the time that we were still waiting to see if HMRC felt the need to revise its treatment of service charges in the light of this decision. It doesn’t. HMRC has confirmed, in Revenue & Customs Brief 67/09 (dated October 27, 2009), that its current policy on the VAT treatment of residential service charges is to remain unchanged following this case.