Steve J Bicknell Tel 01202 025252
Helpful Comments on Tax and Finance – Bicknell Business Advisers Limited www.bicknells.net
The rules for service charge accounts are set out in Tech 03/11
Service Charges are designed to pay for management, repairs and maintenance, they are not intended to make a profit and so will not generally incur a tax charge.
If, however, they include Interest or Ground Rent potentially there could be a taxable profit.
Service Charges in accordance with ICAEW Technical Release Note 03/11 are accounted for outside of the company and are a type trust account.
Within a property lease the landlord often agrees to be responsible for:
The critical factor in whether they are vatable of not is wording of the lease.
If they are additional consideration to the main supply of rent they will be treated the same as the rent, which for residential usually means they are exempt (unless its a commercial property opted to tax).
However, if the lease doesn’t specifically cover these costs then they will be standard rated for VAT!
Management Agents will be supplying the landlord not the tenants so their costs will always be standard rated unless the extra-statutory concession is applied.
If you provide services to freehold owners of dwellings your supply is taxable because there is no supply of domestic accommodation to link those services to. However this is unfair to freehold owners, especially those living on the same estate as leaseholders. To address this inequity an extra-statutory concession allows all mandatory service charges paid by occupants of dwellings toward the:
(a) upkeep of the common areas of a housing estate, such as paths, driveways and communal gardens; or
(b) upkeep of the common areas of a block of flats, such as lift maintenance, corridors, stairwells and general lounges; and
(c) general maintenance of the exterior of the block of flats or individual dwellings, such as painting, and
(d) provision of an estate warden, house manager or caretaker,
to be treated as exempt from VAT.
Where you apply the concession and treat the service charges as exempt your right to recover the associated input tax may be restricted. This may also have an impact on your eligibility to remain registered for VAT.
To read the rules in more detail see VAT Notice 742
The answer depends on whether you have made a Taxable Supply or not.
A vatable inter company charge would be where one company buys business services and goods from suppliers and shares them with another related company so for example the invoice might say:
Recharge from Company A to Company B
10% Insurance
5% Rent/Rates
8% Motor/Travel
12% Office Salaries (but check notes below on employment)
As long as the charges have a logical and reasonable basis for them then these costs can be recharged plus VAT (even if the original item such as insurance wasn’t originally vatable)
However, the following are not Taxable supplies for VAT:
Common Directors – Notice 700/34 (May 2012)
An individual may act as a director of a number of companies. For convenience one company may pay all the director’s fees and then recover appropriate proportions from the others.
The individual’s services, such as attending meetings or approving expenditure, are supplied by the individual to the companies of which they are a director. The services are supplied directly to the relevant businesses by the individual and not from one company to another. Therefore there is no supply between the companies and so no VAT is due on the share of money recovered from each company.
Joint Employment – Notice 700/34 (May 2012)
Where staff are jointly employed there is no supply for VAT purposes between the joint employers. Staff are jointly employed if their contracts of employment or letters of appointment make it clear that they have more than one employer. The contract must expressly specify who the employers are for example ‘Company A, Company B and Company C’, or ‘Company A and its subsidiaries’.
Paying a Bill on behalf of an associated business
This is basically an inter company loan which will be repayable in full, its not a taxable supply.
Why does this matter?
An article in Tips and Advice – VAT issue 11October 2012 reported that HMRC have applied penalties of up to 30% of the error where incorrect treatment has been applied.
So it is very important to get the VAT treatment correct.
Alternatively you might consider forming a VAT Group so that you don’t need to charge VAT on inter company charges but this isn’t always a practical solution as it means changing the VAT registration and doing a single return for all companies/businesses in the VAT group.
steve@bicknells.net
