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...