The European Court of Justice has ruled on a case about the VAT liability of services provided to tenants under a property lease.

The case centred around London law firm Field Fisher Waterhouse - itself a tenant under a property lease - which argued that the services provided to it by its landlord should be regarded as separate supplies to that of the lease of the land and, therefore the separate supply of items such as water, heating, building repair and cleaning services should be subject to VAT.

But HMRC successfully argued that the service charges were part of a single supply of the land and thereby exempt from VAT.

Lorraine Parkin, head of VAT at Grant Thornton, said: 'It is not uncommon for leases to stipulate that the tenant must pay for additional services provided by the landlord and for such charges to be reserved as rent due under the terms of the lease. HMRC sees this as forming part of the single supply of the right to occupy the property.

'However, following an earlier judgment in the case of Tellmer - which ruled that the additional cleaning services should be regarded as separate supplies - Field Fisher Waterhouse has argued that they should be afforded the same treatment.

Parkin said the ECJ has differentiated between the two and that in the Tellmer case, the tenant had the choice to buy cleaning services from a third party. But a contractual obligation under the lease meant the tenant had no choice but to buy the additional services from the landlord.

As a result, Parkin said the ECJ confirmed that the additional services supplied by the landlord are to be treated as part of the single supply of the right over the land and, in the absence of an option to tax, the landlord's supplies are exempt from VAT.

'The theory goes that if the additional services had been treated as separate supplies that were not exempt from VAT, they must, by default, be taxable supplies', said Parkin.

'Tenants occupying property on which their landlords had not opted to tax would, it seems, have been entitled to make a claim to HMRC to reclaim VAT on the charges even though none had been explicitly charged by the landlord. Those tenants expecting a claim will no doubt be disappointed by this judgment.'