Service Charges and VAT registration

Can landlord collect service charge monies, then register for VAT and claims back VAT on repairs

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Scenario: Towards the end of a financial year, a landlord collects service charges monies to the value of £100k from commercial tenants which will be used for major repair works (debit bank and credit reserve fund). The following year, the landlord elects to waive exemption from VAT and carries out the repair works. The VAT on the repair invoices is reclaimed.

Surely this is wrong? 

Should the landlord cancel the demands for the service charge monies that were issued when not VAT-elected and reissue them with VAT applied?





Replies (4)

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By Jason Croke
03rd Apr 2024 08:32

Starting point is when landlord opted to tax, they would likely have required permission from HMRC (having previously made exempt supplies). As opposed to just notification of the option to tax, in some scenarios, an option is only valid once HMRC give permission

In theory, nothing wrong with an exempt rent/service charge becoming taxable via an option to tax but depends on values involved and whether opting is automatic or requires permission.

Notwithstanding the above point, landlord now has an opted property for 20 years and must charge VAT on service charge and rent in future.

See section 5, and in particular, 5.1, 5.6 and 5.9 (if permission required but not sought, the option to tax is invalid).

Thanks (1)
Replying to Jason Croke:
By Steadfast
03rd Apr 2024 12:31

Thank you so much for your help Jason and for the link to the guidance.

I think the last section of the extract below "and excludes any premiums or payments in respect of occupation after the date on which the option takes effect" is the relevant section.

The Landlord has raised a one-off amount (£100k) to be used for major works during the period after the option takes effect. To my mind, this amount therefore, cannot be considered an exempt supply as it relates to a period after the date on which the option to tax is to take place.

"You do not wish to recover any input tax in relation to the land or building incurred before your option to tax has effect, and the consideration for your exempt supplies has, up to the date when your option to tax is to take effect, been solely by way of rents or service charges and excludes any premiums or payments in respect of occupation after the date on which the option takes effect."

Thanks (0)
paddle steamer
03rd Apr 2024 09:11

If the 100k was to cover the gross cost, recovery of the repair being permitted within the leases, and the landlord has charged this to his/her/its tenants and has now only expended £83.33k (the net cost), then looks like tenants are likely due a refund from the landlord. of £16.66k, they have been overcharged.

Thanks (2)
Replying to DJKL:
By Steadfast
03rd Apr 2024 12:33

Many thanks DJKL for your help. Yes, I agree, the tenants would be due a refund of £16.66k under this scenario but surely that refund can't be funded by HMRC?

Thanks (0)