In the summer of 2011 the First-tier Tribunal which hears appeals against decisions relating to tax made by HM Revenue & Customs requested a preliminary ruling from the Court of Justice of the European Union (ECJ) on whether service charges paid pursuant to commercial leases attract VAT. The question required consideration of whether the provision of the services is a separate taxable supply or whether it is an element of a single exempt supply of a lease of land (if the landlord has not exercised the option to tax for VAT purposes).
Following the First-tier Tribunal’s request, the ECJ has held that it is a matter for the national court to decide whether services provided for a service charge, and land provided for a rent, under a lease of commercial property are so intrinsically linked to each other that they amount to a single taxable supply.
The ECJ noted that in most, if not all commercial leases, landlords have the right to terminate a lease on a tenant’s failure to pay the service charge which suggests a single supply, but this is not necessarily conclusive. On the other hand, the fact that the services can be provided by a third party property management company does not rule out there being a single supply. Although it will be for the tribunal to make a final decision on the matter, the ECJ was of the opinion that there was a single taxable supply and, as a result, VAT is not payable on the service charge if the landlord has not exercised the option to tax the property. The ECJ stated that, in the opinion of “the average tenant”, the services would not be regarded as a stand-alone product, but rather as a means of enhancing its enjoyment of the commercial premises occupied under the terms of the lease.
Given that the ECJ’s decision supports HM Revenue and Customs current position on the VAT treatment of service charges one does not expect there to be any changes to this area of taxation. If you have any queries regarding service charges in commercial leases please contact our Commercial Property Department.