Following the Supreme Court decision in the case of Balhousie, HMRC has published (in Revenue & Customs Brief 13 (2021)) its policy change concerning the operation of the deemed supply charge arising in certain cases where a building has been built or acquired on a zero rated basis by reference to relevant charitable or relevant residential purpose intended use.
The provisions of Schedule 10 of the VAT Act provide that the “disposal of the entire interest” in a qualifying property (within ten years of the relevant purchase) triggers a tapered self-supply charge. HMRC thought that this applied even where the disposal was subject to an immediate leaseback to the purchaser, and that this was nonetheless disposal of an “entire interest”. The Supreme Court disagreed, since (self-evidently) the seller never lost an interest, so the entire interest had not been disposed of. HMRC accepts this position and has issued its revised policy which is as follows:
HMRC policy in relation to the self-supply charge
The disposal of your entire interest in a property will not occur when all the following conditions are in place:
- a qualifying property must have been purchased
- when the property is sold, there must be an immediate lease in place, which is a seamless transaction with no time lapse
- the lease must be for the remaining term of the 10 years from the original purchase date or longer
- the property must be continually used or operated for a qualifying purpose, meaning the business suffers no break in trade during the sale and leaseback
If these conditions are not met then the sale of the property or the giving up of a long lease within the 10-year period will be subject to the self-supply charge for the remaining term, as you will have disposed of your entire interest in the property within the 10 year period.
This is self-explanatory. Note the need for the leaseback to be for sufficient as to cover the remaining part of the ten year term. HMRC does not mention the role of break clauses, but one can assume that they are unwise (at the very least) and that there should be a commitment to full retention of the leaseback interest for the above period.
The reference above to a “break in trade” presumably also means “break in qualifying use” where a relevant charitable purpose is concerned. CTG will press HMRC to clarify that point.
Graham Elliott is CTG’s Technical Adviser