Hidden VAT trap on charity and relevant residential buildings

The 2021 UK Supreme Court decision in Balhousie Holdings highlights the risk of incurring a substantial additional VAT cost on change of use or disposal of charity buildings or relevant residential purpose ('RRP') properties that were constructed or acquired VAT-free. 

Zero-rating relief for new build charitable and RRP buildings

A zero-rate VAT relief is available to organisations who acquire or construct new charity buildings or RRP properties (including care homes and residential accommodation for students or school pupils). However, a self-supply charge applies, reversing or reducing the VAT-saving achieved, if the building is used for another purpose or disposed of within a 10-year period.

Supreme Court upholds care home provider’s appeal

The Balhousie appeal involved a residential care home provider which acquired a new building, which was zero-rated on the basis of its intended use of the property for RRP. Balhousie subsequently entered into a sale and leaseback arrangement to finance the acquisition and future development plans. The sale and leaseback involved the freehold sale of the building and the simultaneous grant of a long lease of 30 years back to Balhousie.  

HMRC regarded the freehold sale of the building as the disposal of Balhousie’s entire interest in the care home and levied a self-supply VAT charge of £800,000. However, the unanimous judgement at the Supreme Court found that the particular sale and leaseback arrangements ensured continuous use of the property by Balhousie and therefore, Balhousie did not dispose of its ‘entire interest’ in the property.

This decision is significant and opens up opportunities for organisations to raise funding via sale and leaseback arrangements without disturbing the original zero-rating relief achieved on the acquisition or construction of the building. However, there remain many other circumstances where organisations are unfairly penalised by the self-supply charge. 

Wider impact of the self-supply charge

Until 2011, there was no self-supply liability unless the actual physical use of the building changed. However, under the current rules, any disposal by an organisation of its entire interest in the building crystallises a self-supply charge of all or part of the VAT that was originally relieved. This self-supply charge applies regardless of whether or not the physical use of the building changes.  

This means, for example, that significant irrecoverable VAT could arise where a care home provider sells a care home to another care home operator. However, somewhat unfairly, should the building be sold for use as a hotel, VAT is unlikely to be a cost to either the seller or the purchaser as the seller could opt to tax and charge VAT on the sale, thus allowing the seller to recover any self-supply charge as input tax. Any VAT charged to a hotel operator would typically be recoverable.

This decision serves as an important reminder to organisations who have taken advantage of this VAT relief for the construction or acquisition of a building for a RRP or charitable use, that a 10 year period exists during which time HMRC can ‘clawback’ a proportion of the VAT saving should the taxpayer dispose of its entire interest or should its use of the building change. It can be all too easy to trigger this self-supply charge, so VAT should always be considered when changing your arrangements concerning these buildings. 

For more information please get in touch with Ian Carpenter or your usual RSM contact.