Sale and leaseback retained care home zero-rating: UKSC
A new Supreme Court VAT ruling in favour of Scottish care home operator Balhousie Holdings has been claimed as setting an important precedent for UK business.
Five Justices unanimously allowed an appeal by Balhousie over the process in which Balhousie engaged in the sale and leaseback of one of its care homes.
The Value Added Tax Act 1994 makes a zero VAT allowance for companies that are involved in the construction or conversion of buildings used for relevant residential or charitable purposes. If the building use is changed or the company disposes of the property, that zero VAT allowance is "clawed back" and the company is expected to pay VAT.
The issue in the case was whether Balhousie disposed of its "entire interest" in the care home by the sale and leaseback. If it did then, pursuant to para 36(2) of sched, 10 part 2 to the 1994 Act, HMRC was entitled to impose a "self-supply charge", which effectively clawed back the benefit of the zero-rating.
Balhousie successfully resisted the charge before the First-tier Tribunal, but the Upper Tribunal and the Inner House of the Court of Session found in favour of HMRC, on the basis that Balhousie had disposed of exactly the interest which it acquired by the zero-rated grant, regardless of the lease which it received simultaneously.
Allowing Balhousie's appeal, the Supreme Court ruled that the transaction did not trigger one of the clawback criteria and therefore the zero VAT allowance should still apply.
Giving the judgment, Lord Briggs, with whom Lord Hodge, Lord Sales and Lord Carloway (Lord President of the Court of Session, who sat on the appeal) all agreed – Lady Arden gave a concurring judgement – said the key issue was whether under para 36(2), construed purposively, the clawback was triggered by the sale and lease, viewed realistically.
To interpret para 36(2) purposively, it was necessary to read it in context with paras 35 to 37, which contained a mechanism for withdrawing the benefits of zero-rating on the occurrence of either of two stated events within 10 years from the completion of the building. It was clear that the intended purpose was to claw back the benefit of the zero-rating because the benefit of the relief could no longer flow through to the intended beneficiaries as consumers. It could be assumed that the benefit of the zero-rating was passed on to the residential occupants of the care home through lower charges, thus para 36(2) encouraged the recipient of the zero-rated supply to maintain some level of economic interest in the premises and commit to operating the building for the specified socially desirable residential or charitable use for 10 years after its completion.
Paragraph 36(2) was not concerned with whether the ending of Balhousie's "entire interest" in the care home arose from a single transaction or a series of transactions. For this reason, the Inner House was wrong to focus on whether the sale and lease could be treated as a single transaction, and case law from the European Court of Justice on whether multiple transactions needed to be viewed separately or together for VAT purposes was irrelevant. On the facts as found by the First-tier Tribunal, there was no moment when Balhousie had disposed of its entire interest in the care home.
Further, HMRC was wrong to treat the "interest" as the specific interest that BCL acquired by the grant (ownership), such that disposing of the ownership interest, no matter what happened at the same time, meant triggering the self-supply charge. That was clear from paras 35(2) and 37.
In her judgment, Lady Arden considered that the principles of EU VAT law were relevant, but it was clear from the decision in Mydibel v État belge (Case C-201/18) that the sale and lease had to be treated together as a single transaction.
Lucy McCann, litigation partner at Brodies, who advised Balhousie, commented: "We expect the Supreme Court's ruling on Balhousie's case to have a significant impact on the use of sale and leaseback structures, providing clarity that such vehicles can retain a zero rating for VAT, if appropriately structured. This decision extends beyond the care home sector and will be welcomed by both business and professional advisers."