UK: Property Service Charge – Separate Taxable Supply For VAT?

The recent CJEU judgment in Field Fisher Waterhouse did not provide a decision but referred the case back to the UK courts. It did, however, offer analysis and guidance on what may constitute a single or a separate supply for VAT purposes.

The background

The taxpayer paid rent on a property and also paid a service charge for building related services. The taxpayer argued that the service charge should not be exempt like the rent. The services should not be regarded as ancillary, but treated as a separate taxable supply resulting in the opportunity to recover the input tax arguably included in the service charge.

The questions

The UK court inquired whether, in order to decide whether there was a single exempt supply or two separate supplies, it was relevant that the landlord was entitled to terminate the lease agreement in case the tenant failed to pay the service charge. Further, the referring court asked how important it was that the services could in theory be provided by a third party.

The judgment

The CJEU reaffirmed the familiar principle that to determine the extent of a supply all circumstances must be taken into consideration. The fact that the landlord may cancel the lease if the service charge is not paid would support a single supply but is not decisive. Nor is it decisive that the services could be provided by a third party. The overall analysis would suggest that the CJEU did not necessarily agree with the taxpayer, however the case has been referred back to the UK courts to determine how closely linked the service elements are.

What now?

The Field Fisher Waterhouse case has been referred back to the UK First-Tier Tribunal. However, we understand that the taxpayer has asked for this case to be stood over behind the Upper Tribunal case of Middle Temple that HMRC is appealing.

Middle Temple not only provided a lease of office accommodation that it had opted to tax, but also recharged an invoice from Thames Water for unmetered water to the tenants. For historic pipe work related reasons, the tenants did not receive the supply directly from Thames Water and Middle Temple successfully argued that the water supply constituted a separate zero-rated supply.

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