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HMRC have clarified their policy regarding the VAT liability of service and cleaning charges paid by tenants in leasehold properties.
The Revenue's guidance relates to RLRE Tellmer C-572/07 [2009] STC 2006, which concerned cleaning services provided by a landlord to tenants of a residential property.
The main challenge in Tellmer was to decide whether the cleaning services for the common areas in an apartment building qualified for VAT exemption as part of the overall payment of rent by the tenants, or was a separate charge subject to the standard rate of VAT.
The court ruled that the service was standard rated, on the basis that the tenants had a clear choice as to whether they used the landlord to do the cleaning work or another third party supplier. It was this element of choice that meant that the cleaning charges were detached from the main rental agreement.
HMRC’s policy remains unchanged: i.e. where the service charge arises as a condition under a lease and is provided by the lessor (or his agent) without the lessee having a choice, the rent and service charge are treated as a single supply.
Independent VAT consultant Neil Warren said: ‘The element of choice in the Tellmer case was the key factor. If the tenants had used a third-party contractor to do the cleaning work, they would have been charged VAT so it is only fair that the landlord does not gain a pricing advantage by being able to provide the same service on a VAT-free basis.'
Further information can be found in Revenue & Customs Brief 67/09.
