Are service charges VAT exempt?

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    Are service charges VAT exempt?

    In these circumstances do you think the service charge would be VAT exempt?
    If so, I imagine it would benefit the landlord as he could reclaim the VAT output?

    - Apartment block of 10
    - Management company is managed by apartment owners
    - Management company owns freehold
    - Management company is VAT registered
    - Service Charge is paid to Management company

    Is this relevant?

    Thanks for any views.

    This is an apartment block of residential property. Rent on residential property is exempt from VAT. The VAT treatment of service charges follows that for rent.

    Therefore the supply of service charge is exempt from VAT.

    The consequence of making exempt supplies is that the input (sic - not output) tax is not reclaimable by the landlord.


      1. If both the management company and freehold are owned by all 10 flats , I would expect the collection of annual ground rent to cease.

      2. The building maintenance expenses charged to service charge account and shared by the flat owners may include suppliers VAT rated bill such as electric bill ( 5 % VAT charged) cleaning co ( 20% VAT charged )and audit accountant ( 20% VAT) etc.


        Originally posted by Floob View Post
        In these circumstances do you think the service charge would be VAT exempt?
        V.A.T. threshold is £ 73000, and for a flat with £ 7300 per year service charge
        would be time to find somewhere else. ( £ 1300 per year each is a strarting point )

        But remember, you don't sell anything, and service charge is there ONLY to pay
        the bills.
        How would you like your bank to charge you V.A.T. on the money in your
        bank account, that is there only to pay bills.
        As that's what service charges are -- Just there to pay the bills.
        Putting it in it's very simplest form.


        So no, Residential


          A number of your costs will not be subject to VAT the largest often being Insurance so the net receipts from VAT will be more than you can reclaim. So if your block bill is £10000 plus vat is £12000 you each pay £1200 and £2000 is "paid out" to HMRC.

          As the £10000 includes say £2000 for insurance your reclaim is say 20% of £8000 say £1600 so that's £2000 paid out and £1600 back.

          This is very simple example and yes I am ignoring lower rates such as energy at 5%.
          Based on the information posted, I offer my thoughts.Any action you then take is your liability. While commending individual effort, there is no substitute for a thorough review of documents and facts by paid for professional advisers.


            There seems to be some confusing comments about the management company charges and OP should clarify if this is a real or hypothetical situation.

            A management company owning the freehold of just ONE block of 10 apartments and with no collection of annual ground rent , would be held as " a dormant company " in annual returns to Companies House and definitely not be registered for VAT with hmrc. The service charge account would be run under a few leaseholders or handed over an external managing agent whose annual management fee ( say around 200pds per flat ) may be subjected to VAT.

            This means there is no 20% VAT applied on the annual service charge payable by each apartment owner.


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