VAT charges on staff – now in force!

1 November, 2018

Changes to the way in which the costs of staff based on site are treated by HMRC came into force yesterday and will affect the amount of service charge lessees will pay as well as how managing agents budget and account for those costs because VAT is now payable on the costs of staff based on site.

Up until September of this year there was little or no clarity as to whether the costs of staff, including house managers, concierge, cleaners, caretakers and gardeners should be subject to VAT. In the absence of any clear guidance many larger managing agents collected VAT as part of the service charges so that lessees would not face a large bill if the rules changed and VAT had to be backdated. This means that for some lessees the change will not affect their day to day service charges, for others there will be an immediate increase.

The reason that HMRC have brought out this new guidance is because managing agents have been wrongly applying the Extra Statutory Concessions which only landlords can benefit from. HMRC say that managing agents cannot use the concession because they are in fact providing services to the landlord which makes it a taxable supply.

If a Landlord provides staff directly then there will be no VAT to pay. Over time we may see changes in the way staff are employed, a reduction in numbers of staff on site and potentially the complete doing away with house managers in retirement properties.

The good news is that the VAT charges will not be backdated so if an agent has been collecting VAT as part of the service charges already then there will be a credit to the account.

If you need any advice in relation to this please do not hesitate to contact our leasehold specialist Jane Canham at Jane.Canham@storrarcowdry.co.uk.