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FTT finds that VAT on staff costs are reasonably incurred

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29th June 2023

Philip Rainey KC and Carl Fain discuss the recent FTT decision in Various Lessees of Battersea Reach and St George Wharf v St George South London Ltd & Oths

This was the first challenge in the FTT to the reasonableness of the managing agent employing staff on site rather than the landlord with consequent effect that VAT was payable on those costs and charged to the tenants as part of their service charge following the comments of Judge Robinson in Ingram v Church Commissioners [2015]:

“…Given that the standard rate of VAT is 20%, this could potentially give rise to significantly increased service charges. That may potentially give rise to an argument as to the reasonableness of properties being managed in this way and that the VAT thus passed on via the service charge is not reasonably incurred for the purposes of section 19 of the 1985 Act. However, the appellant has not sought to raise such an argument in this case, to do so would require evidence and depend very much on the facts of the particular case. Thus it would be wrong of me to express any view about it”.

Lessees in two very large multi-storey mixed-use developments next to the river Thames had argued that staff should be directly employed by the landlords in a way which would not attract VAT. Over the two developments, the VAT on the staff costs was approximately £500,000 per year.

They argued that a change in employment would mean that the VAT was saved and would not cause any significant additional cost or disruption to the service provided and that it was unreasonable for landlords to refuse to do so.

The Tribunal found in the landlords’ favour, determining that, in deciding not to employ site staff directly, the landlord acted reasonably. They concluded that “…both the management and tax risks involved in changing the arrangements for the employment of staff were such that it was not unreasonable for a landlord to refuse to do so.”

The lessees had suggested that there were different models which could be implemented that would enable the landlords to benefit from a VAT saving on staff costs. However, the lessees had failed to show these “were realistically capable of being implemented” or “make a coherent initial case as to an alternative course for the landlord to adopt and for the Tribunal to consider either at the outset of the application or at any time thereafter.”

In the circumstances, the VAT on staff costs included in the service charges was held to be reasonably incurred.

Interestingly, the FTT considered that Ingram v Church Commissioners [2015] in so far as it sought to discuss or examine the meaning or effect of ESC 3.18 (the exemption of VAT for service charges on staff costs) had been decided per incuriam. Further, it had probably been wrongly decided in light of the House of Lords’ decision in Trustees of Nell Gwynn House Maintenance Fund v Customs and Excise Commissioners [1999] 1 WLR 174 (which was not before the Upper Tribunal). But this did not matter because any doubt had been resolved subsequently by VAT Information Sheet 07/18 dated 7 September 2018.

A copy of the decision can be found here.

Philip Rainey KC and Carl Fain acted for the First to Seventh Respondents in a team with Nicola Shaw KC and Sam Brodsky of Gray’s Inn Tax Chambers (Tax counsel) and Michael Lee of 11 Kings Bench Walk Chambers (Employment counsel) who were all instructed by Natasha Rees, Ryan Didcock and Emma Gosling of Forsters LLP.

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