In HMRC v Balhousie Holdings Limited [2017] UKUT 410, the Upper Tribunal (UT) agreed with HMRC, that the sale and leaseback of a care home was the disposal of an entire interest in a property and a self-supply VAT charge arose.
The first grant of a major interest in a Property designed as a relevant residential or relevant charitable property is zero-rated.
If however, there is a change of use in that property, within 10 years, a deemed self-supply may arise under Schedule 10 of the VAT Act 1994.
The self-supply arises on a disposal of an entire interest in the relevant property or where the property ceases to be used for a relevant residential or relevant charitable purpose.
In 2010 a subsidiary of Balhousie, which was not within its VAT group, constructed the care home.
When construction was complete, it sold the property to Balhousie, triggering the zero-rated first grant and enabling VAT recovery.
Balhousie entered into a sale and leaseback with a Real Estate Investment Trust (REIT) to fund the purchase, in 2013.
The First-Tier Tribunal (FTT) took the view that the sale and leaseback was a composite transaction forming a commercial unity. Although Balhousie had disposed of its entire interest in the care home, the sale and leaseback did not constitute a disposal of an entire interest for the purposes of Schedule 10.
The taxpayer’s appeal was allowed.
The UT disagreed with the FTT:
- For VAT purposes it is not permissible to take a global view of a series of transactions in the chain of a supply.
- Under EU case law, it is made clear that each transaction in a chain of transactions must be examined separately.
- Although Balhousie occupied the property before and after the sale and leaseback, that did not stop the disposal of an entire interest in the property taking place.
- Balhousie had replaced a right to occupy as owner with a right to occupy under a lease.
- Balhousie no longer enjoyed any rights flowing from the original zero-rated supply it received.
On this basis, Balhousie had disposed of its entire interest in the care home and the linked transaction (the lease), did not affect this treatment.
HMRCs appeal was allowed and a standard rated deemed self-supply arises.
Links
VAT: Land and property at a glance
VAT: Land and property (notes)
External link: HMRC v Balhousie Holdings Limited [2017] UKUT 410
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