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.

Background

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.

Source: HMR. www.hmrc.gov.uk. Copyright acknowledged.