Selling a care home need not mean giving up every legal interest in it. The question for VAT was whether Balhousie Care Ltd had at any point ceased to hold an interest when it sold the building and simultaneously took a 30-year lease of it.
The care home and the financing
Balhousie Holdings Ltd is the representative member of a VAT group that includes Balhousie Care Ltd (BCL). The wider group owns and operates care homes in Scotland. Faskally Care Home Ltd acquired land and completed the Huntly Care Home in November 2012. BCL took informal occupation and began operating it as a care home, with a view to buying it from Faskally.
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To finance its purchase, BCL sold the home to Target Healthcare REIT Ltd and took a 30-year lease back. The conveyances and lease took effect on the same day. The property continued to be used as a care home.
The First-tier Tribunal found that the missives left no moment between the sale and the lease when BCL’s possession was unsupported by either ownership or a leasehold interest. HMRC did not pursue that point further. The sale and the lease were therefore simultaneous in effect, even if they were separate transactions.
Why a VAT charge was said to arise
The conveyance from Faskally to BCL was a zero-rated first grant of a major interest in a building intended for use as a care home. Viewed separately, the sale to Target and the lease back were each exempt supplies. The home was used as a care home throughout, so the alternative clawback for a change from qualifying use did not arise.
Zero-rating of supplies connected with buildings for certain residential or charitable uses, including care homes, is a permitted departure from the normal VAT charge. Part 2 of Schedule 10 to the Value Added Tax Act 1994 claws back that benefit from the recipient, called P, if either of two events occurs within ten years from completion. One event, in paragraph 36(2), is that P has disposed of P’s entire interest in the premises. The other is a change to a non-qualifying use. Either event creates a notional self-supply. The VAT on that supply is calculated from the VAT that would have been charged on the earlier zero-rated supplies, tapered down over the ten years. The sum in dispute exceeded £800,000. The issue was whether the sale and leaseback meant that BCL had disposed of its entire interest.
The courts below
The First-tier Tribunal held that paragraph 36(2) was not triggered: there was no time when BCL was neither owner nor lessee. The Upper Tribunal and the Inner House of the Court of Session held that it was. They treated the sale, which disposed of the very interest acquired under the zero-rated grant, as sufficient on its own, whatever happened under the simultaneous lease.
Lord Briggs’s construction
Lord Briggs, with whom Lord Hodge, Lord Sales and Lord Carloway agreed, allowed the appeal. The language of paragraph 36(2) is simple. It applies if, during the ten-year period, P has disposed of P’s entire interest. A reader would understand that to mean that a time came when P no longer had any interest in the premises, including a lease. If P still held a lease, it could not have disposed of its entire interest. A sale and leaseback leaves P with a lease at the end of the process. It triggers the charge only if it is structured so as to leave a gap between completion of the sale and the lease taking effect. There was no such gap here.
HMRC’s interpretation focused on what BCL sold: the ownership it had acquired in the original zero-rated transaction. The difficulty was that the clawback provision could also apply where the original zero-rated supply consisted of construction work or materials. In such cases there might be no originally acquired property interest with which to make HMRC’s proposed comparison.
Lord Briggs considered that the disposal trigger could be understood as requiring the recipient to retain some economic stake for a substantial period. Even if its purpose were uncertain, the word “entire” still pointed to the absence of any remaining interest.
For the majority, the sale and lease could be separate supplies for VAT purposes. The question under paragraph 36(2) was whether, taking account of both, there was a point when BCL had no interest. The simultaneous transactions left no such gap.
Lady Arden’s concurring reasons
Lady Arden also held that the appeal should be allowed, but by a different route. She considered that the conditions for zero-rating engaged EU VAT principles, including the principle of fiscal neutrality. The Inner House had treated the sale and the lease as two transactions and applied the usual approach that each supply is separate. In her view, the later decision of the Court of Justice in Mydibel showed that a sale and leaseback entered into to raise funds is, as a matter of economic reality, a single transaction. On that basis the composite effect was that BCL did not dispose of its entire interest in the home.
Verdict: The Supreme Court unanimously allowed the appeal. BCL had retained an interest throughout, so HMRC could not claw back the original zero-rating on the ground of disposal.
Source: Balhousie Holdings Ltd v Commissioners for Her Majesty’s Revenue and Customs [2021] UKSC 11
