The cleaning of common areas of leased premises has been seen as an ancillary supply to the lease of the premises. This means that the VAT treatment of service charges in respect of common parts has followed the VAT treatment of the rent. In other words, the supply of cleaning services by a landlord would be exempt (in the absence of an option to tax in respect of the premises).

Has this changed?

Maybe. The Advocate General's opinion in Tellmer Property suggests that the cleaning of common parts should be regarded as a separate standard rated supply (regardless of whether rent is exempt or standard-rated under the relevant lease). However, the AG's opinion may not be followed by the ECJ, and in any case the opinion acknowledges that national courts may determine that the terms of the tenancy agreement and the established legal practice of the member states may allow a different interpretation.

I am a Landlord. What should I do?  

Watch this space. It may be necessary to begin accounting for VAT on service charges but it is not yet clear.

I am a Tenant. What should I do?

If your business:

  • leased premises between 1973 and 1997
  • paid service charges, and
  • paid rent which was exempt from VAT

It may be possible to make a VAT reclaim in relation to those service charges (which would be deemed to have been VAT inclusive).

It is worth considering making a protective claim before 31 March 2009 (being the deadline for claims for VAT overpaid between 1973 and 1997). However, this would only be worthwhile if the amounts involved are significant in view of the cost of making such a claim, and the possibility that the AG's opinion is not followed or has little impact in the UK