The Court of Justice of the European Union (CJEU) has ruled that the provision of property maintenance and cleaning services can form part of the main supply of leasing office premises, implying that its earlier decision in Tellmer is limited to the circumstances of that case.
In Field Fisher Waterhouse (FFW), a law firm rented serviced offices in London. It paid rent for occupation of the building, a contribution towards the cost of buildings insurance and a charge for services which, under the terms of the lease, had to be provided by the landlord and included cleaning, heating, lighting and security. The landlord had not exercised the option to tax so the charges paid by FFW were treated as consideration for an exempt supply, and the landlord was unable to recover any VAT incurred in connection with its property maintenance. FFW contended that the charge for services included an embedded element representing the landlord's VAT-inclusive costs, for which FFW should have been entitled to an input tax credit. FFW were relying on RLRE Tellmer Property in which the CJEU had held that services such as the cleaning of the common parts of a building could in specific circumstances be a separate supply from the leasing of the building.
The view of the UK tax authorities (HMRC) is that rent and service charges are consideration for a single supply when those services are provided by the landlord, with the lease being the main component and services ancillary to the main supply. HMRC's position is that Tellmer does not apply where the landlord is obliged by the terms of the lease to provide maintenance services.
In FFW's case, the CJEU held that the provision of services enabled FFW to enjoy their occupation of the building and thus could be ancillary to the main (exempt) supply of leasing a commercial building. It will now be a matter for the UK courts to decide whether in this case the services provided were so closely linked to the leasing of the property that there was a single composite supply. Given the steer from the CJEU, it seems likely that the UK courts will find that there was a single supply
The CJEU did not refer to Tellmer in its judgment, but the facts of FFW's case were different in certain key respects. For example, the services in Tellmer related to the common parts of a building, while the services provided to FFW affected all the space in the leased building and were essential to its use and function as an office. Also, in Tellmer, it would have been possible for the tenants to arrange for a cleaning company to invoice them direct, so the provision of cleaning services could be regarded as a separate supply.
The CJEU did not address the question of input tax recovery for embedded VAT, although HMRC made submissions on the point.