Landlord wins dispute over passing on VAT charges to tenants

A landlord was entitled to recover from tenants the VAT charges it had to pay its managing agent in respect of caretaking staff.

That was the decision of the Upper Tribunal (Lands) in the case of a landlord who hired a managing agent to fulfil the various obligations set out in his lease agreements. The agent was responsible for employing the staff needed to carry out the work.

The invoices submitted by the agent included VAT on staff salaries, which the landlord passed on to the tenants as part of the service charges.

The tenants objected. The issue before the tribunal was whether the VAT charges fell within the concession set out in VAT Notice 48. This exempts “”all mandatory service charges or similar charges paid by the occupants of residential property towards the upkeep of the dwellings or block of flats in which they reside and towards the provision of a warden, caretakers and people performing a similar function for those occupants””.

The tribunal ruled in favour of the landlord. It held that the concession did not apply because the agent’s charges were not “”mandatory service charges””. The concession did not apply to any charges paid by the landlord to third parties for the supply of services even though the cost of those services was passed on to a residential occupier through a service charge.

Where a landlord employed staff directly and passed the cost on to the tenants through a service charge, no VAT would be payable on the salaries of such staff. On the other hand, where the same staff were employed by a managing agent who invoiced the landlord for their services, VAT would be payable on the salaries and that could be passed on to the tenants through the service charge.

Please contact Janice Young if you would like more information about the issues raised in this article or any aspect of commercial property law.