What impact are service charge concessions having on housing associations?

HM Revenue and Customs (‘HMRC’) has recently published Revenue and Customs Brief 6 (2018), to be read in conjunction with VAT information sheet 07/18, which provides important information regarding a concession that relates to service charges.  This release is having a significant impact on many in the housing sector and we are keen to remind you of its importance.

HMRC has confirmed that the concession only applies when residential leaseholders and freeholders pay a mandatory service charge for the same common services on a common estate. Its purpose is to allow the same VAT treatment of these service charges for all of those living on the estate.  If a landlord is contractually obliged to provide services to all occupants of a common estate, they may choose to use the concession to treat these supplies, when made to a freeholder, as exempt from VAT.

Housing Associations and other landlords often use other Housing Associations or property management companies (‘the subcontractors’) to fulfil their legal obligations to the occupants of an estate.  To fulfil its role, the subcontractor often purchases goods and services on behalf of the landlord and charges a management fee for providing such a service. 

This guidance confirms that this management fee is taxable at the standard rate of VAT and is not covered by ESC 3.18. HMRC are clear that the subcontractors cannot use the concession.

Furthermore, HMRC states that the subcontractors cannot use the concession to:

  • treat their supplies as if made to the occupant rather than the landlord
  • recharge costs borne on behalf of the landlord, back to the landlord
  • recharge staff or personnel costs to the landlord

HMRC are of the view that the management company is providing a standard rated supply of services to the landlord, not the occupant, even though the subcontractor is often collecting payment on behalf of the landlord directly from the occupant.

From 1 November 2018, all subcontractors that have not correctly applied ESC 3.18, must correctly account for VAT.

If you are a landlord or a subcontractor involved in similar arrangements, we recommend that the supply chain is understood in detail and the correct VAT treatment applied.  This will affect both landlord and subcontractor housing associations.  If you have made any other errors in accounting for your supplies of goods or services that do not involve the incorrect application of ESC 3.18, you must correct these in accordance with the normal rules, which will usually require a 4-year correction period.

The information released by HMRC is a useful reminder of other related issues that we often see in the housing sector as set out below.

Invoicing arrangements for services provided on behalf of a landlord

If you pay for goods and services required by a landlord (you may use the monies collected on behalf of the landlord from the occupants of the building to do so). You have two choices to ensure that you account for VAT correctly:

  1. if you recover input tax on these goods and services which you acquire on behalf of the landlord, you should use a specific invoicing procedure outlined in VAT guide (VAT Notice 700) and charge the same amount of tax to the landlord in the same VAT accounting period, or
  2. you can treat the recharge of the costs you incur on behalf of the landlord, as a disbursement providing the relevant conditions are.

Supplies of staff

If you are a supplier, and supply staff or personnel to a landlord, (either directly or bought in from a third party), this is a taxable supply to the landlord.  The VAT liability of staff is commonly misunderstood.

If staff is not being supplied, the supply may be a service and if certain conditions are met, the service may be exempt from VAT, often under the welfare exemption.

To ensure the correct VAT treatment, a detailed understanding of the arrangements is required.

‘Retained rent’

Any rent collected on behalf of a landlord and kept by a housing association and not used to meet the contractual obligations of the landlord, will be payment for the services provided by the entity acting on behalf of the landlord. These services are taxable at the standard rate of VAT.  

Due to the way in which this income is accounted for on the finance system, it is often missed on the VAT return workings.

For more information, please contact Daniel Guy.