The tax landscape for property management businesses is changing. Even though a few new rules have recently been introduced, changing approaches to current rules, along with wider economic conditions, have left property management businesses facing increased risks. With HMRC actively challenging those that fall foul, it’s important that property managers are alert to the risks and the best strategies to tackle these.
Why are VAT risks rising?
Long-held views on VAT practices are now facing significantly heightened scrutiny. This means that current protocols, which for years have not been questioned, are now triggering potential problems. The result is that managers are finding themselves vulnerable to retrospective assessments, reduced margins, and VAT leakage.
These shifting sands are being driven in part by the higher interest rates, as these have made client-earned interest a more ready source of exempt income, thus creating more risk of restricted VAT recovery under partial exemption rules. That is to say that whereas previously interest earned on client money has been treated as incidental, with limited effect on VAT recovery, this is rapidly becoming a less viable approach.
HMRC is also taking a more restrictive approach to disbursements and the direction of supply, something which has been underlined by the recent decision in Places for People Homes Ltd v HMRC. This decision is particularly important for property management arrangements which involve costs being recovered from landlords and tenants, with HMRC now taking a far more strict approach to what qualifies as a disbursement (i.e. outside the scope of VAT) rather than a recharge (and therefore taxable). Property managers will find that staff costs, contractor charges, and certain aspects of service charges are increasingly coming under the microscope.
Why this matters for property managers
The result of these developments is that the recovery requirements for overhead VAT for property managers will change. This is because the amount of exempt income will increase, affecting the level of residual input tax using the standard partial exemption method. If exempt interest increases, businesses can find themselves over the de minimis threshold, which restricts VAT recovery on overheads, prompting historic under-declarations where returns have not been adjusted.
What should property managers do now?
Amid these changes, one thing is certain: it’s essential that property managers review their processes now.
Taking action sooner rather than later will identify whether current VAT processes remain fully compliant, and in line with the latest commercial considerations for a business, and will pre-empt any retrospective adjustments
In the first instance, managers should review historic VAT returns where interest income has increased materially, to identify potential over-recovered VAT and decide whether a standard-method override calculation should be applied for previous tax years.
The standard method override applies where the VAT recovery you get under the normal turnover‑based partial exemption method is materially different (more than £50,000, or differing by more than 50% of the residual input tax and at least £25,000) from what a fair, use‑based approach would produce.
In those cases, you must adjust the VAT recovery to better reflect how costs are actually used, even if that means overriding the standard calculation. Going forward, most businesses will still have time to propose a special method calculation to HMRC to have effect from the start of the 25/26 tax year.
Importantly, in whichever route is taken property managers should ensure their position is robustly documented throughout and fulfils HMRC’s expectations for concurrent evidence, especially in cases where interest is treated as incidental.
Other tactics include ensuring invoicing practices differentiate between true disbursements and recharges, and making sure contracts and arrangements are in line with criteria to determine this.
However, alongside these immediate actions, property managers should also look to develop a longer-term strategy for VAT – one which delves deeper into governance considerations and their relevance to commercial concerns. This will give businesses a strong foundation to navigate ongoing HMRC scrutiny as it continues to increase.
For instance, property managers should keep up to date with developments relating to VAT case law and HMRC’s implementation, including the expected Upper Tribunal assessment of EU law aspects. An awareness of the wider context for VAT changes will help managers understand and action them effectively.
Another good habit to form is to be on the front foot for engaging with HMRC. Where there is uncertainty around positions or a historic risk, proactively speaking to HMRC about this can help create a constructive dialogue before problems escalate.
Finally, reframing how property managers think about and approach VAT can help embed best practice into wider business activity and reduce pressure points around VAT. If VAT considerations are built into forecasting, nasty surprises are far less likely to rear their head later in the year, and these considerations become part of the familiar business planning cycle – rather than an ad hoc, compliance-driven headache.
Historic practices can no longer go unchecked. As HMRC increases its scrutiny, so must property managers increase their own scrutiny of VAT treatments. However, by taking action now property managers can not only rise to the current challenges, but set themselves up for future success in the face of continuing uncertainty.
