My limited company owns the freehold of a building, which is divided into six separate self-contained long leasehold flats. The company is obliged to carry out works to maintain and repair the structure and exterior of the building (the major works) and recoup the cost of that work from the leaseholders. We, the directors of the company, have received several tenders to do the work and will shortly nominate one contractor. The total cost of this phase of the work amounts to £144,725 plus VAT: a total of £173,670. The contractor is registered for VAT and will be charging the company VAT when carrying out the works. There are other works envisaged plus professional fees, all of which will attract VAT. 

The company is not currently registered for VAT and does not charge leaseholders VAT on the service charge demands payable twice yearly. It is understood that the ground rent element of the service charges does not attract VAT.  

The questions that we need answering are: (1) Can we or must we register for VAT when issuing service charges demands for the recovery of the cost of the major works? (2) Can the company recoup the VAT element of the major works and associated fees? None of the anticipated works are improvements. 

Arthur replies: 

As most landlords letting domestic property are making supplies which are exempt from VAT, they are generally unable to recover VAT on related costs. Any VAT on their expenditure therefore forms part of their costs, and must be taken into account in fixing their rents. Your case is no exception. So, it is not going to help you to register for VAT because you are not making taxable or VAT-able supplies. However, if any of your long leaseholders are letting out their property, since none of the major works are improvements, they can claim this expenditure as allowable repairs.