Homeowners gain from VAT shift on charges

THERE is good news for thousands of homeowners who pay a service charge on communal facilities, writes Sue Fieldman.

From 1 April they will not have to pay VAT on many of the services provided by their landlord, such as upkeep of the common parts or provision of a porter.

If you live in a leasehold property and pay a service charge to your landlord, this is already exempt from VAT provided that the service is mandatory.

However, owners of freehold houses who pay a service charge for maintaining the communal parts of an estate do have to pay VAT.

So do leaseholders where the service charge is not paid direct to the landlord but to a company independent of the landlord.

It is a ridiculous anomaly. The liability for VAT - an extra 17.5 per cent on your bill - depends on the status of the supplier of the services or the type of property you own.

Dermot McLellan, a partner in the chartered accountants Stoy Hayward, said: 'Customs and Excise have received complaints, particularly from people in sheltered housing where there is frequently a mixture of freehold and leasehold properties. The leaseholders would not be paying VAT and the freeholders would.'

'Moreover, with sheltered housing, once the landlord has developed the estate he often then leaves the management and services to a separate service company,' Mr McLellan added, 'and the homeowners are then liable for VAT.'

The unfairness of these arrangements has prompted complaints to the European Commission. As a result, Customs and Excise has decided to bring in a more equitable system.

From 1 April an extra-statutory concession will be introduced to bring all residential homeowners on to the same footing.

They will be exempt from paying VAT if each resident is obliged to accept the service because it is supplied to the estate or block of flats as a whole.

The concession is not retrospective and the tax point will be when you pay the charges or the landlord issues the service charge bill, whichever is the earlier.

Optional cleaning services supplied personally to a resident - for example, carpet cleaning, shopping or gardening - continue to be taxed in their own right.

The concession does not apply either to the VAT treatment of service charges in respect of holiday accommodation.