VAT paid on Apartment block maintenance

[lampshade]

Hi All.
Hope someone can shed light on the following. I own a lease in a purpose built block of flats (30 in 3 linked blocks, with 3 separate entrances).
We all pay our service charges as requested the freeholders appointed service/managing agent.
The question I have relates to VAT paid on any general/ necessary charges incurred in the running/upkeep of the common areas.

For example, if it was deemed necessary by the managing agents to replace all of the floorcoverings in the common areas/stairs and VAT is charged by the supplier, I assume that the service/managing agent will make the order and the invoice will be payable by, and sent to them, including VAT.
So the question is, as payment for that work would come out of monies paid by tenants, can that VAT be reclaimed by the service agents, and secondly, if so, should that VAT payment be returned to the tenants?
This work for example would be done because it is necessary, not just for the sake of it.
Any advice much appreciated

[JK0]

AFAIK, there is no scope for getting VAT off for cash when you are talking about service charge.

[jpkeates]

If the agent can claim back the VAT, they'll have to charge the same VAT to the tenants, so there's no VAT to "return".
VAT is always (ultimateky) paid by an end user who isn't VAT registered.

[Gordon999]

The service charge account pays the bills + VAT from each separate supplier.

The managing agent may charge their annual fee + 20 % VAT. ( turnover is over £80K p.a )

The electric company charges cost ( for units consumed on domestic property ) + 5% VAT.

The Insurance company will charge IPT on their insurance premium + 12% VAT.

The window cleaner may charge Nil VAT because his annual turnover is below £80K p.a. .

[lampshade]

thanks for taking time to post. Maybe I have not explained what I am meaning. I am not talking about paying cash to avoid VAT, that is illegal.

But if VAT is paid on a bill by our service agents, (say £10,000 + £2,000VAT) and because that service agent is VAT registered, I assume they will be able to claim the VAT back. (£2000)
But if we are just charged the full invoice value INC VAT. then we will have paid the 20% VAT but the service agents will get it back and keep it.
Is that not how VAT works?
Considering it is not the service agents money in the first place, it belongs to the leaseholders. So presume we should only be asked to pay the net cost without VAT??

[jpkeates]

If the service agent is VAT registered, they have to charge VAT - it's not optional.

Companies don't claim back the VAT they charge, they pay HMRC the VAT they charge less the VAT they are themselves charged (calculated once every quarter.

So, if the agent is charged £10000 plus VAT (£2000) to do the work, and charge you £10,000 plus VAT (£2000), they'll not pay any tax - because they haven't added any value (hence VAT).

If the agent is charged £10000 but no VAT (£0) to do the work - because the supplier is not VAT registered - and charge you £10,000 plus VAT (£2000), they'll pay £2000 - which is the value they've added. In reality, there will be other VAT to reclaim from other business transactions and activity.

VAT is tax owed to the state, not income.

[leaseholder64]

I would have thought that it was the section 42 trust that is being charged VAT, not the agent. Obviously the agent's fees are subject to their VAT status, and if they provide maintenance services in house, they would be subject to their status.

Although not quite the same, my bank charges VAT on their fiees, but doesn't charge VAT on the value of any money I instruct them to pay.

On the other hand, I'm not in this situation myself, and I'm not sure how discretionary trusts are handled for VAT.

This, secondary source, indicates that residential service charges are VAT exempt, so there is no possibility of recovering VAT, even if you are a VAT registered landlord: https://www.chiene.co.uk/GetFile.php?file_id=219

In any case, we are only really talking about the VAT on the margins and labour of the non-registered supplier, as, although there is no VAT invoice and no identified VAT amount, VAT will have been for the materials they used.

[lampshade]

hi
thanks again for the replies.
To be clearer if I may.

As normal we all pay an annual service charge to cover things like cleaning, gardens, common electric, general maintenance. And I know that all of these services are from one man businesses that are not VAT registered. So no VAT is payable on those services.

But when a one off replacement is needed (ie as in common area floorcoverings, then a larger VAT registered company will be used and will add VAT to the bill).

Because there is no reserve fund, all of the money needed will be an extra one off payment made by each leaseholder to cover the cost.
(This has already gone through the consultation period necessary by law in cases where £250 or more is required by each leaseholder.)

I have never heard any mention of a section 42 account, as our service charges are payable to an account in the name of the maintenance managements account.

I have also never seen VAT mentioned on any annual expenditure report, and I am sure that some companies will be VAT registered. And that includes the service agent themselves.

So when the decision is made to go ahead with the expenditure, the best quote will be used and will include VAT, the Maintenance agent will issue the order to the flooring company on that basis. When the work is completed the payment, inc VAT, will be made by the maintenance company, using monies obtained from leaseholders.
As the Maintenance company is VAT registered I assume they will be able to claim the VAT back, but of course the leasholders cannot as we are not VAT registered.
So my point is ; Each leaseholder will be invoiced for their share, and that will contain VAT.
If we are invoiced for the work INC VAT, then we have paid the VAT to the maintenance agent, but they can claim it back?
So, unless they return it us, then the maintenance agent has just made 20% on the deal, for doing nothing.?

Is that correct or have I missed the point somewhere?

[leaseholder64]

This FTT ruling gives some more information (in a case that proved an exception to the exemption rules): http://landschamber.decisions.tribun...RX-48-2015.pdf The ruling notes the law is not too clear.

One point to note is that, according to https://www.gov.uk/guidance/vat-exem...tial-exemption VAT exempt amounts don't contribute to turnover for the purposes of determining that VAT registration is needed, so a small managing agent could be handling large amounts of service charges, without needing to register.

[leaseholder64]

It appears to be exempt, so they can't claim back the VAT even if the money passes through their books.

Section 42 creates a statutory trust out of the service charges, although there may well have been one implied by the lease. Any service charge you pay on account (e.g. at the beginning of the year, to cover costs in that year), or that is in a reserve fund, is in that trust, and does not belong to the managing agent (they are trustees, not owners. RICS guidelines indicate they need a separate bank account. This money is protected if the agent goes bust.

If you are being charged immediately, then that trust may not be involved.

The VAT exemptions look like they cover the situation where the money has to go through the agents books, to actually make the payment. I gather is a disputed area as to whether service charge payments should actually go through the books, or be treated as coming direct from the trust or service charge payer.

(For commercial property, it seems it is possible to opt into VAT, in which case there will be VAT added to the service charge.)

[leaseholder64]

There is someone starting from the same misunderstandings in this thread: http://www.taxationweb.co.uk/forum/v...es-t28896.html The thread covers both the trust and exemption aspects.

I don't think they end up convinced, but that's their problem.

[ram]

The service charge funds belong to the leaseholders.

The managing agents, on behalf of the leaseholders ask for work to be done.
The bill arrives and they pay it on behalf of the leaseholders.( They pay the bottom line figure which includes vat if chargeable by the contractor )

The service charge money IS NOT part of the managing agents money, is not part of the managing companies turnover, is not in the managing agents company records for the running of the managing agents office.

The leaseholders money is in a separate bank account to that of the Managing agent, and has nothing whatsoever to do with the M.A's company, nor the M.A's vat returns.

The managing agents do not bill you for the work. They tell you how much the bills cost, on your behalf, and take YOUR money to pay those bills. They do not take their own money to pay the bills, therefore YOUR money does not go through "the books" of the managing agents finances.
Therefor V.A.T questions do not exist.

you ask me to get all your windows cleaned, you give me the money to pay the window cleaner, or enough to cover it. i get it done for you, give you the bill from the window cleaner, and any change due.
It does not go through my accounts, as i did not pay from my own money to pay the window cleaner.
I get paid for my work if you pay me a fixed fee per year to ask someone else to clean your windows every 6 months.

[leaseholder64]

The leaseholders money is in a separate bank account to that of the Managing agent

Whilst this is considered current best practice, and is in the RICS guidelines, the legislation that would have put it into effect was never "commenced", so it isn't a legal requirement. It is still true that it isn't the managing agent's money; it belongs to the service charge trust fund, not to the agent

The RICS guidelines are referenced in legislation, but their status is similar to the Highway Code. Complying with it can be used as a defence against an accusation of mismanagement, but you are not committing an offence just because you don't comply. (E.g. the Highway code says you should not park within a certain distance of a junction, but there is no offence in doing so. However, you could be charged with obstructive parking and showing that you were more than that distance from the junction might help your defence.)

The Guidelines are at http://www.rics.org/Global/Service_c...ition_2016.pdf and section 6.2 is the one that is most relevant here.

[leaseholder64]

One of my sources for the uncertainty as to whether money should be accounted as going through the agent's books is sections 1.2.2 and 1.2.4 of ICAEW TECH/03/11 https://www.icaew.com/-/media/corpor...nts.ashx?la=en However, the distinction is academic here, as the VAT exempt status means there is no effective difference.