Tenants face increase in property service charges following European Court ruling
Tenants in rented residential property face a possible increase in service charges of 15 per cent now and 17.5 per cent from 1 January 2010 following a European Court ruling delivered on Thursday 11 June.
The European Court was asked to reach a decision following a case in the Czech Republic, in which the tax authorities had sought to tax the charges made by a landlord for the cleaning of the common parts in an apartment block. The Court ruled that the cleaning of common parts of a building did not fall within the VAT exemption for let property and represented a separate supply subject to VAT.
Terry Dockley, a VAT specialist at accountants and business advisers James Cowper, said: “This decision is likely to have a big impact on both landlords and tenants as there is a requirement for UK VAT law to reflect the decisions of the European Court. As yet we do not know when HMRC is likely to adopt this ruling
“HRMC have typically allowed domestic service charges to be treated as exempt from VAT even where these services are provided by a third party. This exemption will probably have to be dropped, even where the services are supplied by the landlord, meaning that tenants can expect to see a 15 per cent increase in their service charges once HMRC implement the decision, with further increases from January 2010.
“This ruling will also present problems for landlords, many of whom are not VAT registered. They will have to get to grips with an unfamiliar tax regime, with severe penalties for late payment. It is also likely to make it harder to negotiate an increase in rents and service charges at the next rent review.
The decision could not have come at a worse time for residential property investors who, according to a report published by the BBC on 10 June, seeing one in every three properties repossessed or having a receiver of rent appointed.
Terry Dockley, VAT Director, James Cowper LLP, Tel: 01635 35255 or email: tdockley@jamescowper.co.uk
17.06.2009