In the area of VAT, the issue of ancillary services in the rental of real estate has remained unresolved for many years. However, there is now a change that may have a negative impact on many landlords.
We were used to the fact that we did not reflect the development of case law in the Czech Republic and the tax administrator usually tolerated three approaches to determining VAT regimes for services related to the rental of real estate.
1. Supply outside the subject of the tax
This special concept was and still is widely used, especially by territorial self-governing units. This is also because the information still available in Section 36(11) (now para. 13) was intended primarily for municipalities. However, it is also widely used by the private sector.
What is its essence? In the case of the 1:1 re-invoicing of expenses to the tenant on behalf of the tenant and on their account (no increase) via balance sheet accounts, according to the aforementioned information, VAT does not have to be deducted. Of course, the claim for deduction is not allowed.
This concept is particularly advantageous for smaller municipalities and landlords due to its simple accounting and easy calculation of turnover.
In my opinion, the condition that it must be an expenditure that is incurred by the landlord on behalf of and for the account of the tenant is in most cases difficult to meet. It is also very difficult to prove that it is not an ancillary service that should be shared by the main supply (see below). This is confirmed by the Supreme Administrative Court in its judgment No. 2 Afs 345/2016 - 34 of 2017, in which it rejected the application of this regime to the re-invoicing of accident insurance.
2. Ancillary services
Ancillary services have relatively clear contours in European and domestic case law, which is also confirmed by the official answer of the Ministry of Finance of the Czech Republic to the question of the Union of Towns and Municipalities of the Czech Republic regarding the application of VAT on the rental of a cemetery plot and on the provision of related services.
In this opinion, the Ministry of Finance repeats the conditions according to the established case law, where it should be ancillary services from the point of view of VAT:
- The supply that is essential for the recipient (the tenant of the cemetery plot) and which is the clear objective of the transaction from their point of view is the actual rental of the cemetery plot. The provision of the services connected with it constitutes a supply which, although separable from the actual rental, cannot be regarded as the purpose of the transaction. However, these services are a means of obtaining a better benefit from the supply consisting in the rental of the cemetery plot, and on the best possible terms.
- The amount claimed for the services connected with the rental of the cemetery plot does not, in fact, consist only of the payment for supply related to the rented cemetery plot, but also the tenant's share in the administration, maintenance and proper operation of the entire cemetery plot. However, the provision of the services in question in connection with the rental of the cemetery plot is certainly closely linked to the actual rental of the cemetery plot.
- A regular tenant of a cemetery plot does not have the opportunity to choose the provider of services related to the rental of the cemetery plot.
- A regular tenant of a cemetery plot does not have the opportunity to choose only those services from the offered or provided services related to the rental of the cemetery plot that they really want and will use, nor can they decide on the intensity of the provision of these services. The tenant of the cemetery plot thus pays for a certain package of "related" services in connection with the rental of the cemetery plot, regardless of whether all of those services relate to the rented cemetery plot and whether they actually use or want to use all of those services. The link between the two types of services is thus somewhat looser, but this does not alter the close interdependence and interrelatedness of the whole package of services provided.
- This interdependence and interrelatedness of the two types of services is further increased if the contractual conditions do not allow the tenant of the cemetery plot to merely rent the cemetery plot without using the related services.
It is clear that the above conditions are met in most lease relationships, i.e. not only in relation to the rental of a cemetery plot.
The General Financial Directorate is currently preparing information in a similar wording. It follows that the financial administration should not have to deal with the past.
The main principle of an ancillary service is that it assumes the VAT regime of the main supply. In practice, this means that all ancillary services connected with the rental of property would either be exempt without deduction or taxable at the standard rate.
3. Separate supply
In the absence of ancillary services, any supply related to rental property will be subject to a separate VAT regime.
A good example of a separate supply is the provision of internet access. In fact, ancillary service should not be an end in itself. The tenant certainly has multiple offers and not just one offer from the landlord. In some cases, the same approach can be applied to cleaning services.
However, for several transactions offered by the landlord together with the rental of the property, the line between ancillary service and separate supply is very thin. It will depend on how the transactions are set up, the wording of the contractual documentation and, of course, the reality on the ground.
I believe everything is leading to the fact that payers will choose the second option in most situations. This means that the services provided by the landlord in connection with the rental of the property will be treated as ancillary to the main supply - the rental of the property.
The principal and secondary approach will have several negative impacts. Taxable leases will become more expensive for supplies that are currently taxed at a reduced rate. In the case of exempt leases, the shortening coefficient for landlords will worsen and in some cases the VAT deduction applied in the past to technical improvements made will have to be adjusted.
It is possible that after the information is issued, there will be further discussions as to whether the separate supply regime will apply only to services or whether it should also apply to supplies of goods (e.g. electricity). Nevertheless, I see no reason why the conclusions of settled case law should differ.
In conclusion, I would like to point out that from a VAT point of view, the actual state of affairs is always the key issue. Artificially setting up two contracts for the lease itself and the separate provision of related services may in some cases be considered as an abuse of law.
We will be happy to assist you in setting up your lease terms and conditions to avoid any disputes with the tax authorities.