For property management businesses, VAT risk in 2026 is being driven less by new rules and more by increased scrutiny of long-standing assumptions. Higher interest rates have made client-earned interest a more material source of exempt income, increasing the risk of restricted VAT recovery under partial exemption rules. At the same time, the Places for People Homes Ltd v HMRC decision has reinforced HMRC’s narrow interpretation of disbursements and the direction of supply.
Together, these developments mean many property managers may be exposed to VAT leakage, reduced margins or retrospective assessments, even where existing practices have gone unchallenged for years. The practical message is clear: now is the right time to review.
When it comes to tax, HaysMac has you covered. Our Indirect Tax Team can support with a focused VAT compliance review, helping you identify and address risk areas before they escalate. And if you’d like longer-term, strategic advice, our My Tax Partner service takes a wider view, joining up VAT with your broader tax strategy to give you clarity, confidence and better long-term decision-making.
Read on to delve further into these issues…
Client-earned interest: a growing partial exemption risk
For many years, interest earned on client money was treated as incidental, with little impact on VAT recovery. That position is becoming increasingly difficult to defend.
With higher balances and higher interest rates, retained interest can now represent a material source of exempt income. HMRC’s view is clear: where interest is retained by the property manager, it constitutes an exempt supply and must be factored into partial exemption calculations.
Why this matters
Property management businesses typically make taxable supplies through management fees. Introducing a significant exempt income stream changes the recovery profile of overhead VAT. Under the standard partial exemption method, residual input tax is recoverable by reference to the ratio of taxable to total income. A spike in exempt interest can therefore push businesses over the de minimis threshold, restrict VAT recovery on overheads, and trigger historic under-declarations where returns have not been adjusted.
HMRC is actively challenging businesses that have failed to reflect interest income in their calculations, with assessments, penalties and interest increasingly common.
Practical steps to consider now
Where interest income has increased or arrangements have evolved over time, it is important to pause and reassess whether your current VAT treatment remains appropriate. A focused review now can help identify issues early, avoid retrospective adjustments, and ensure your VAT recovery methodology continues to reflect the commercial reality of your business.
Steps that you can take:
- Review historic VAT returns where interest income has increased materially
- Assess whether the standard method produces a fair result, or whether a Partial Exemption Special Method would better reflect the business’ activities
- Document your position clearly, particularly where interest is treated as incidental. HMRC expects concurrent evidence
Disbursements under scrutiny: lessons from Places for People Homes Ltd
The FTT decision in Places for People Homes Ltd v HMRC ([2025] UKFTT 1417 (TC)) provides an important reminder of how narrowly disbursement rules are applied in practice.
While the case focused on Maintenance Trust Companies (MTCs), the principles are highly relevant to wider property management arrangements, particularly where costs are recovered from landlords or tenants.
Key findings included:
- Direction of supply: the Tribunal found that services were supplied to the lessor, not the lessee; critical in determining VAT liability
- No composite supply: maintenance services could not be subsumed into an exempt supply of land
- Employment costs were not disbursements: they formed part of the MTC’s own taxable supply and were subject to VAT on recharge
Why this matters for property managers
HMRC’s position on disbursements remains uncompromising. For a cost to qualify:
- The client must receive the supply directly
- The agent must act purely as a paying intermediary
- The exact cost must be passed on with no uplift and shown separately on the invoice
Where these conditions are not met, the cost is a recharge, not a disbursement, and VAT applies. This commonly affects staff costs, contractor charges and elements of service charges that have historically been treated incorrectly.
Strategic VAT considerations for 2026 and beyond
As HMRC scrutiny increases and VAT case law continues to evolve, property managers need to take a more strategic view of VAT rather than treating it as a purely technical or compliance-driven issue. As such, the priorities for 2026 centre on strengthening governance while ensuring VAT outcomes are fully understood and reflected in commercial decision-making.
1. Strengthening compliance and governance:
- Review contracts and arrangements to ensure the direction of supply is clear
- Update invoicing practices to distinguish true disbursements from recharges
- Stay alert to developments, including the pending Upper Tribunal consideration of EU law aspects of the case
2. Protecting margins and cash flow
- Model the VAT impact of increased exempt income and restricted recovery
- Engage with HMRC proactively where positions are unclear or historic risk exists
- Build VAT into forecasting, rather than treating it as a purely compliance-driven exercise
Turning VAT complexity into clarity
Rising interest income and tighter interpretations of VAT law mean property managers can no longer rely on legacy treatments. But with the right support, these challenges can be managed, often improving control, visibility and resilience in the process.
HaysMac’s Indirect Tax team works with property managers and real estate groups to bring clarity to complex VAT issues, combining technical advisory with robust compliance and technology-enabled solutions. Whether you need a targeted VAT health check, support with partial exemption methods, help reviewing disbursement treatment, or a fully outsourced VAT compliance model, our team provides:
- A single point of contact, supported by specialist VAT advisory
- Practical, proportionate advice grounded in how your business actually operates
- Flexible delivery models (insourced, outsourced or co-sourced) to fit your needs
- Ongoing support that future-proofs your VAT position as rules and reporting obligations evolve
Indirect tax compliance report
If you would like to understand how these developments affect your business, or want reassurance that your VAT position is robust, speak to a member of HaysMac’s Indirect Tax team. A proactive review now can help protect recovery, reduce risk and give you confidence as the VAT landscape continues to evolve.
And for further strategic tax support…
With your VAT position reviewed and shored up, why not gain the same reassurance across your wider tax affairs? Through My Tax Partner, HaysMac provides access to an experienced tax lead who works alongside you via regular, agenda-driven meetings, giving you clear oversight of tax risks, priorities and opportunities as your business evolves.
Designed for businesses that need senior tax input but not the cost or commitment of a full-time Head of Tax, My Tax Partner connects VAT, corporate tax and wider structuring decisions into a joined-up strategy. Whether you are managing growth, navigating change or simply want greater confidence that your tax position supports your commercial objectives, My Tax Partner gives you clarity, continuity and proactive insight, so that tax becomes a source of confidence, not complexity.
Whatever your need, we’re here to listen. Contact Dougie Todd to start the conversation.
