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HMRC confirms approach to VAT zero-rating clawback on sale and leaseback

Out-Law News | 11 Oct 2021 | 10:08 am | 2 min. read

A sale and leaseback of a care home will no longer be regarded as the disposal of the entire interest triggering a clawback of VAT zero rating providing certain conditions are satisfied, HM Revenue & Customs (HMRC) has confirmed.

HMRC’s change of view, set out in a recent ‘Revenue and Customs Brief’, follows the Supreme Court’s April 2021 decision in a case involving Balhousie Care Ltd.

Property tax expert Richard Croker of Pinsent Masons, the law firm behind Out-Law, said: “HMRC is limiting the scope of their change in practice to the facts in the Balhousie case”.

“As the Supreme Court said that a purposive approach should be applied to the interpretation of the legislation, it is arguable that the impact of the Balhousie case is wider than its precise facts,” he said

The first grant of a major interest in a building by a person constructing or converting it for use for a relevant residential or charitable purpose is ‘zero rated’ for VAT purposes, which means that VAT is not charged. A ‘relevant residential purpose’ includes use as a house or as a care home.

However, the benefit of the zero rating is ‘clawed back’ if within ten years from the completion of the building the purchaser disposes of its ‘entire interest’ in the building or changes the use of the building from a qualifying to a non-qualifying use. Either of those events happening triggers a 'self-supply' charge to VAT, payable by the purchaser.

Balhousie had acquired a recently constructed care home in Scotland under a zero-rated first grant from the developer and then financed that acquisition by a sale and leaseback of the building with a finance house. HMRC argued that the sale and leaseback constituted a disposal by the company of its entire interest in the care home, triggering a VAT self-supply charge on Balhousie. HMRC argued that the self-supply was triggered because Balhousie had sold the interest which it acquired by the zero-rated first grant from the developer and it was not relevant that by virtue of the leaseback it continued to hold a major interest in the property.

The Supreme Court applied a purposive interpretation to the legislation and said that a clawback was intended to arise when the purchaser no longer had an interest in the land. Lord Briggs said that both the interest Balhousie originally held in the property and the leaseback were major interests and there was no moment when Balhousie had neither of them so that the claw-back provisions did not apply.

HMRC has now confirmed that the disposal of the entire interest in a property will not occur and a clawback will not be triggered if all the conditions specified in the latest brief are in place. These are that a qualifying property has been purchased; and that when the property is sold, there is an immediate lease in place, which is a seamless transaction with no time lapse. In addition, the lease must be for the remaining term of the 10 years from the original purchase date or longer and the property must be continually used or operated for a qualifying purpose, meaning the business suffers no break in trade during the sale and leaseback.

The brief also says that HMRC view a sale and leaseback as two separate transactions “and this was accepted by both the Upper Tier tribunal and Court of Session”, although the Supreme Court did not consider this point.

“HMRC seem to be using the Balhousie decision to support its view that a sale and leaseback is two separate transactions for VAT purposes, even though the Supreme Court did not comment on this aspect,” Croker said.

“The 2019 Court of Justice of the European Union decision in the Mydibel case casts doubt on this interpretation. In that case a sale and leaseback transaction was held to be a single composite transaction for VAT capital goods scheme purposes,” he said.