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Landlords could face grappling with VAT rules and regulations following European Court ruling for taxes applied to domestic services such as cleaning.

Accountant James Cowper says thanks to an EU ruling, tenants face a possible increase in service charges of 15% now and 17.5% from January 1 2010 following a judge's decision in the Czech Republic recently.

The European Court was asked to reach a decision following a case in which the tax authorities had sought to tax the charges made by a landlord for the cleaning of the common parts in an apartment block. The Court ruled that the cleaning of common parts of a building did not fall within the VAT exemption for let property and represented a separate supply subject to VAT.

Terry Dockley, a VAT specialist at James Cowper, says the ruling will present problems for landlords, many of whom are not VAT registered. He says they will have to get to grips with an unfamiliar tax regime, with severe penalties for late payment. It is also likely to make it harder to negotiate an increase in rents and service charges at the next rent review.

Dockley says: “This decision is likely to have a big impact on both landlords and tenants as there is a requirement for UK VAT law to reflect the decisions of the European Court. As yet we do not know when HM Revenue & Customs is likely to adopt this ruling.

“HRMC have typically allowed domestic service charges to be treated as exempt from VAT even where these services are provided by a third party. This exemption will probably have to be dropped, even where the services are supplied by the landlord, meaning that tenants can expect to see an increase in their service charges once the Government implements the decision, with further increases from January 2010.

"The decision could not have come at a worse time for residential property investors who, according to a report published by the BBC in June, are seeing one in every three properties repossessed or having a receiver of rent appointed."

SOURCE: James Cowper, 17/06/09

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