Balhousie - Sale And Leaseback Does Not Constitute Disposal Of 'Entire Interest' In Property

• Published date: 29 April 2021
• Subject Matter: Real Estate and Construction, Tax, Landlord & Tenant - Leases, Sales Taxes: VAT, GST
• Law Firm: Reynolds Porter Chamberlain
• Author: Mr Harry Smith

In Balhousie Holdings Ltd v HMRC [2021] UKSC 11, the Supreme Court allowed the taxpayer's appeal, holding that a sale and leaseback was not a disposal of the taxpayer's 'entire interest' in a care home and accordingly HMRC was not entitled to claw back the benefit of the VAT zero-rating that had applied when the taxpayer acquired the home.

Background

The taxpayer, Balhousie Holdings Ltd (Balhousie) was an operator of care homes. In 2013, it built a new care home and sold it to one of its subsidiaries, Balhousie Care Ltd (Care). The sale was zero-rated for the purposes of Item 1, Group 5, Schedule 8, Value Added Tax Act 1994 (VATA 1994), which provides for the zero-rating of the first grant by a person 'constructing a building ... intended for use solely for a relevant residential or a relevant charitable purpose ... of a major interest in, or in any part of, the building, dwelling or its site'.

Subsequently, Care entered into a sale and leaseback transaction in respect of the care home to a Real Estate Investment Trust (REIT), conveying its interest in the home to the REIT and immediately taking an inferior lease of the home.

Paragraphs 36 and 37, Schedule 10, VATA 1994, provide for a clawback of the benefit of zero-rating if either of two events takes place within ten years of the building's completion. The first (under paragraph 36(2)) is if the original recipient of the zero-rated supply disposes of its entire interest in the building; the second (under paragraph 36(3)) is if there is a change of use of the building from a qualifying use (ie a relevant residential or relevant charitable purpose) to a non-qualifying use. The clawback is effected by a self-supply transaction at standard rate that occurs immediately prior to the disposal, or change of use, as the case may be.

The dispute in this case was whether, by entering into the sale and leaseback, Balhousie had disposed of its entire interest in the care home.

Balhousie was successful in its appeal before the First-tier Tribunal, which agreed with it that the sale and leaseback transaction should not be viewed as a disposal of its entire interest. However, the Upper Tribunal allowed HMRC's appeal and the Inner House of the Court of Session agreed with it, concluding that while the legislation should be interpreted purposively, the transactions undertaken by Balhousie should be construed objectively and it is not appropriate to have regard to the taxpayer's underlying purpose or intentions...