HM Revenue and Customs Brief 67/09
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Issued 27 October 2009
VAT - Liability of property service charges following the European Court of
Justice case of RLRE Tellmer (C-572/07)
This Revenue & Customs Brief sets out HM Revenue & Customs' (HMRC) view of
the judgment of the European Court of Justice ('ECJ') in the case of RLRE
Tellmer ('Tellmer') and confirms that the UK's current VAT treatment of service
charges is unchanged following this decision.
The issue was whether the leasing of apartments and the related cleaning of
the common parts of the apartment building formed a single exempt supply by the
landlord, Tellmer. Tellmer argued this was the case but the Czech authorities
argued that the cleaning services amounted to a separate taxable supply. The ECJ
agreed that in the circumstances of Tellmer, the cleaning services could be
separated from the property rental as a separate taxable supply.
In the UK, it is common for property leasing and letting to include the
provision of service charges for, amongst other things, cleaning services; to
this extent there is some parallel with Tellmer. HMRC's current policy is that
where the service charge arises as a condition under a lease and is to be
provided by the lessor (or his agent) without the lessee having a choice, then
we treat the rent and the service charge as consideration for a single supply -
this is the case in most property leasing. This follows the Judgment of the ECJ
in the case of Card Protection Plan ('CPP') (C-349/96) where the Court held that
there is a single supply where one or more elements are to be regarded as
constituting the principal supply, whilst one or more elements are to be
regarded, by contrast, as ancillary supplies which share the tax treatment of
the principal supply.
The ECJ sought to apply the principles established in the case of CPP, and in
two more recent ECJ cases, Levob (C-41/04) and Part Service (C-425/06), which
also dealt with the issues of single and separate supplies. In reaching its
judgment in the present case the ECJ concluded, on the basis of the limited
facts available, that two separate supplies were made rather than a single
indivisible supply. This must have been because, on the facts of the case, the
tenants in the Czech Republic were not required to obtain the cleaning of the
common parts from their landlord, but had a real option whether to ask their
landlord to perform the cleaning of the common parts for additional
consideration or to obtain those services themselves from a third party.
If, however, there is a requirement for service charges to be paid but the
services are either provided by a different person to the lessor (or his agent)
or they do not arise as a condition under the lease agreement, then HMRC's
policy continues to be that in such circumstances these services are a separate
supply from the lease. However, under certain circumstances, they can be treated
as exempt by concession - see notice 48, ESC 3.18.
Impact of Tellmer
It is clear from the decision of the ECJ that Tellmer itself provided both
the property leasing and the cleaning services to the tenants. However, the
tenants had the choice of making an independent contract with a third party to
provide the cleaning services. In the particular circumstances the court did not
consider that the cleaning services were ancillary to the property letting and,
as a result, concluded that they constituted a separate supply.
On this basis, since the UK only treats leasing of property and related
service charges as a single supply, where the services are provided by the
lessor (or his agent) as a condition under the lease agreement, HMRC considers
that the findings in Tellmer are consistent with existing UK policy.
If you have any queries in relation to this, or any other tax matter, please
contact the Helpline on Tel 0845 010 9000.
About the Author
© Crown Copyright 2009.
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Article Published/Sorted/Amended on Scopulus 2009-10-27 12:33:08 in Tax Articles