Decision Nº LRX 48 2015. Upper Tribunal (Lands Chamber), 15-09-2015
| Jurisdiction | UK Non-devolved |
| Judge | Her Honour Judge Alice Robinson |
| Date | 15 September 2015 |
| Court | Upper Tribunal (Lands Chamber) |
| Judgement Number | LRX 48 2015 |
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UPPER TRIBUNAL (LANDS CHAMBER) |
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UT Neutral citation number: [2015] UKUT 0495(LC)
UTLC Case Number: LRX/48/2015
TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007
LANDLORD AND TENANT – service charges – whether VAT on services provided by managing agent to landlord recoverable as service charges – scope of VAT Notice 48: extra statutory concession para 3.18 – concession only applies to mandatory service charges and does not extent to services supplied to a landlord by third parties
IN THE MATTER OF AN APPEAL AGAINST A DECISION OF THE
FIRST-TIER TRIBUNAL PROPERTY CHAMBER (RESIDENTIAL PROPERTY)
BETWEEN:
MRS JANINE INGRAM Appellant
andCHURCH COMMISSIONERS FOR ENGLAND Respondent
Re: 20 The Water Gardens,
Burwood Place,
London
W2 2DA
Before Her Honour Judge Alice Robinson
Sitting at: Royal Courts of Justice, Strand, London WC2A 2LL
on
8 September 2015
Mr Martin Reiss for the Appellant
Edwin Johnson QC instructed by Charles Russell Speechlys for the Respondent
© CROWN COPYRIGHT 2015
The following cases are referred to in this decision:
R v Her Majesty’s Commissioners of Inland Revenue, ex parte Wilkinson [2005] UKHL 30
Conway and others v Jam Factory Freehold Limited [2013] UKUT 0592 (LC)
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This is an appeal against a decision of the First-tier Tribunal Property Chamber (Residential Property) (“F-tT”) dated 11 March 2015 in which it determined that certain VAT charges were recoverable as service charges.
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The appellant and applicant before the F-tT is the lessee of a flat known as 20, The Water Gardens, Burnwood Place, London W2 2DA (“the Flat”) pursuant to a long lease dated 21 February 1996 (“the Lease”) whereby the Flat was demised for a term of 75 years from 25 March 1965. The respondents are the freehold owners of the buildings known as The Water Gardens which include the Flat.
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By an application dated 11 November 2014 pursuant to s.27A of the Landlord and Tenant Act 1985 (“the 1985 Act”) the appellant challenged the inclusion within service charge demands of certain items of VAT in the three service charge years 2011/12, 2012/13 and 2013/14. In its decision dated 11 March 2015 the F-tT rejected that challenge and held that the relevant items were recoverable.
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Permission to appeal was granted on 23 June 2015 by the Tribunal (Martin Rodger QC, Deputy President). The decision states:
“The VAT treatment of service charges is not straightforward and is not well understood. Uncertainty in this area is highly undesirable and it is appropriate for permission to appeal to be granted to enable the applicant’s contentions on the effect of the Extra Statutory Concession to be considered.”
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The issue which arises in this appeal is whether the relevant items of VAT included in the service charges fall within an extra statutory concession set out in VAT Notice 48 paragraph 3.18 and therefore should not have been included in the service charges.
Factual background
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The services which the respondents must provide and the charges which the appellant must pay for them are set out in the Third Schedule of the Lease. This contains the lessor’s covenants including obligations to maintain, repair, clean and also to
“employ such number of porters and staff as the Lessors shall from time to time think reasonable in and about the performance of the relevant covenants by the Lessors… and the Lessors may pay to Porters and staff in addition to wages such allowances in respect of uniform rent food and maintenance as the Lessors shall from time to time determine And generally the Lessors may employ and pay such contractors agents or servants (including the Agent) and may incur such costs as they shall think necessary or desirable in and about the performance of the covenants and provisions of this Schedule” (paragraph 7).
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Provision for payment of service charges is made in paragraphs 11 to 13 of the Third Schedule. Paragraph 11 begins with the words:
“To the intent (a) that the Lessors shall be fully and effectually indemnified in respect of the cost to the Lessors of the performance of the covenants and provisions of this Schedule the Lessees shall pay by way of additional rent to the Lessors…”
Paragraph 12(2) provides that the appellant must pay a .684% share of the costs.
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The respondents seek to discharge their obligations in the Third Schedule by the employment of Knight Frank LLP (“KF”) as managing agent under block management agreements for The Water Gardens. The latest such agreement is dated 6 January 2014 and covers the period 30 December 2013 to 28 December 2014 but I was informed that similar previous agreements covered earlier periods. The agreement provides for payment by the respondents of a fee which is set out in Schedule 1 Part 2. First, this provides for a flat fee of £130,369.63. Second it provides for “Fees for the Services described in 2.3 of Schedule 2” namely “15% of the total salaries for all site staff employed” (or a relevant proportion of the salary as relates to The Water Gardens). The services described in paragraph 2.3 of Schedule 2 are, in effect, human resources (HR) services as would normally be provided by an HR department “for all site staff employed for the Block (including where appropriate management personnel, cleaning and security services)”. The end of Schedule 1 Part 2 and clause 7.2 of the agreement make clear that the fees are exclusive of VAT which is payable on top. In addition, the fees do not include disbursements.
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There is no dispute that the service charges for the 3 years in question include sums described as “HR fee” and “salaries” paid to KF which include VAT. The 2013/2014 year service charge also includes “salaries” paid to ‘Promise’, a subsidiary company of KF. All the sums claimed as “HR fee” and “salaries” are supported by invoices from KF or ‘Promise’ to the respondents. The invoices relating to “HR fees” are squarely in the nature of a fee; the invoices refer to “HR Management fee for [date] based on [x] % of salary costs as detailed on the attached sheet.” The invoices relating to “salaries” appear to involve simply passing on the salary costs. All the invoices charge VAT on the “HR fees” and “salaries”.
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The appellant does not dispute that the “HR fee” and “salaries” charges are properly recoverable as service charges pursuant to the Lease. Her complaint is that, as a matter of law, VAT need not have been paid by the respondents to KF or ‘Promise’ on such fees and salaries so the VAT element of them was unreasonably incurred for the purposes of s.19 of the 1985 Act and should not be passed on to the lessees.
Value Added Tax (“VAT”)
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VAT is a charge on the supply of goods and services. As a general rule VAT must be charged where the following four conditions are satisfied, see the Value Added Tax Act 1994 (“the 1994 Act”) and in particular s.4:
(1) A supply of goods or services is made within the UK for a consideration.
(2) The supply is made by a person who is, or should be, registered for VAT.
(3) The supply is made in the course of or in furtherance of a business of the supplier.
(4) The supply of the relevant goods or services does not fall into any exempt category for VAT purposes.
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The letting of property constitutes the supply of land for VAT purposes. However, subject to exceptions, the letting of property is exempt from VAT so that no VAT is chargeable on rent, see s.31 and Group 1 of the exemptions in Part II of Schedule 9 to the 1994 Act. A landlord may elect to waive the exemption from VAT in respect of commercial property, see Schedule 10 to the 1994 Act. Where such an election is made, VAT is chargeable on the rent. Such an election is not however available in respect of residential land, see paragraph 5 of Schedule 10. In that case, VAT is not chargeable on the rent.
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The question of whether VAT is chargeable on service charges depends upon whether the service charge is in the nature of rent and thus indivisible from the supply of accommodation. This does not depend upon whether the service charge is reserved as rent under the relevant lease but on whether the service charge is a charge directly related to the tenant’s right of occupation, see Service Charges and Management: Law and Practice by Tanfield...
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