The Property Tribunal determines the issue of VAT on Staff Costs

The First Tier Tribunal (FTT) yesterday handed down its judgment in the matter of Various Lessees of Battersea Reach and St George Wharf -v- St George South London Ltd (and others).

The decision is likely to have important consequences for landlords and managing agents, and it should resolve the longstanding uncertainty following the decision in Ingram v Church Commissioners [2015] and HMRC’s subsequent clarification of the VAT treatment for the supply of services made by managing agents.

Lessees in two large multistorey mixed-use developments next to the river Thames had argued that staff should be directly employed in a way which would not attract VAT. They suggested that a change in employment would achieve the stated objective and not cause any significant 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 deemed to be reasonable, and the lessees’ application was dismissed.

Forsters was led by Senior Associates Ryan Didcock and Emma Gosling, and Partner Natasha Rees, acting for the freeholder and associated landlords, with counsel Philip Rainey KC and Carl Fain of Tanfield Chambers (property), Nicola Shaw KC and Sam Brodsky of Gray’s Inn Tax Chambers (tax), and Michael Lee of 11 Kings Walk Chambers (employment).