Summary

A landlord had been entitled to recover by way of service charges VAT which it had to pay to its managing agent in respect of the salaries of the agent's caretaking staff. Such VAT did not fall within the extra-statutory concession set out in VAT Notice 48 para.3.18.

Facts

The appellant tenant appealed against a decision that certain VAT charges incurred by the respondent landlord were recoverable as service charges.

Under the lease, the landlord was obliged to "employ such number of porters and staff as the Lessors shall from time to time think reasonable in and about the performance of the relevant covenants by the Lessors". The relevant clause continued as follows: "the Lessors may pay to Porters and staff in addition to wages such allowances in respect of uniform rent food and maintenance as the Lessors shall from time to time determine And generally the Lessors may employ and pay such contractors agents or servants (including the Agent) and may incur such costs as they shall think necessary or desirable in and about the performance of the covenants and provisions of this Schedule". The landlord sought to discharge its obligations under that clause by employing a managing agent, which in turn employed caretakers/staff in relation to the development of which the tenant's flat formed part. The invoices submitted by the managing agent to the landlord included VAT on the salaries of the staff in question, and such VAT was included as part of the service charges sought to be recovered from the tenants. The issue was whether the relevant items of VAT included in the service charges fell within the extra-statutory concession set out in VAT Notice 48 para.3.18, which exempted "all mandatory service charges or similar charges paid by the occupants of residential property towards the upkeep of the dwellings or block of flats in which they reside and towards the provision of a warden, caretakers and people performing a similar function for those occupants".

Held

The concession did not apply, as the agent's charges were not "mandatory service charges". The concession did not apply to any charges paid by the landlord (or other person levying the service charge) to third parties for the supply of services even though the cost of those services was passed on to a residential occupier through a service charge. Where a landlord employed staff directly and passed the cost on to the tenants through a service charge, no VAT would be payable on the salaries of such staff. On the other hand, where the same staff were employed by a managing agent who invoiced the landlord for their services, VAT would be payable on the salaries and that could be passed on to the tenants through the service charge. Given that the standard rate of VAT was 20 per cent, that could give rise to significantly increased service charges. That might give rise to an argument as to the reasonableness of properties being managed in that way; it might be said that the VAT thus passed on via the service charge was not reasonably incurred for the purposes of the Landlord and Tenant Act 1985 s.19. However, the tenant had not sought to raise such an argument, so it would be wrong to express any view about it. In the circumstances, the landlord was entitled to claim the disputed items of VAT as service charges (see paras 35, 44-46 of judgment).