01 April 2021
Owners and users of new charity buildings or relevant residential properties (such as care homes and accommodation for students and school pupils) are often entitled to acquire these free of VAT. This is an invaluable benefit as most of these organisations are not entitled to fully recover VAT on new buildings. However, those who have claimed this relief must remain wary of a self-supply charge which can retrospectively reduce or eliminate the VAT-saving if they dispose of the building or change its use within ten years.
The UK Supreme Court has recently released a favourable judgment regarding one potential trigger of this self-supply charge. This is good news, as it may allow these organisations to use leaseback arrangements to finance new charitable or residential buildings without losing the VAT reliefs on their construction or acquisition.
The appeal concerns Balhousie Care, which operates a chain of residential care homes in Scotland. Balhousie acquired a new building, free of VAT, by issuing a certificate confirming its intention to use the property for a ‘relevant residential purpose’ i.e. a care home. To raise funds to acquire the new building, it entered into a sale and leaseback arrangement with a real estate investment trust. Balhousie sold this care home, along with two others it owned, to the trust, which simultaneously granted 30-year leases back to Balhousie. Balhousie continued to use all three properties as care homes.
A dispute arose with HMRC over whether this arrangement meant that Balhousie was liable to the ‘self-supply’ VAT charge. HMRC took the view that Balhousie had disposed of its entire interest in the new building at the sale stage, before receiving the leaseback, and assessed Balhousie for VAT of £800,000 plus £24,000 interest. Balhousie appealed, arguing the lease and leaseback did not amount to a disposal of the care home.
Having begun its journey through the tribunals and courts in 2016, the case has now reached the Supreme Court for a final ruling. On 31 March 2021, the Supreme Court found in favour of Balhousie, with all five of the justices agreeing that it was not liable to this VAT charge because it had not disposed of its entire interest in the care home. The reasoning of the majority was that the VAT charge applied only when the taxpayer was left with no interest in the property. While Balhousie had disposed of its freehold interest in the building, it had simultaneously taken back a leasehold interest. There was effectively no moment in time during the sale and leaseback transaction when Balhousie had no interest in the property.
This is an important decision because, having been determined by the Supreme Court, HMRC cannot appeal further. It is now settled case law that this type of transaction will not give rise to a substantial self-supply charge on a building used for a relevant residential or charitable purpose.
The judgment is complex, and HMRC has yet to comment on its practical impact on other organisations in similar circumstances. Charities, care homes and other users of relevant residential buildings (including schools and universities) should compare their contracts to the Balhousie decision to determine precisely which boxes they must tick to be sure they will not incur a large irrecoverable VAT bill from HMRC.
It is also important to remember that the self-supply charge is not just triggered by leaseback arrangements and can arise in many other ways. Organisations that have benefited from the zero-rate relief for these buildings within the last ten years should always consider the VAT impact of any intended disposal of the property or business, where it includes the transfer of a property.