Charities need to consider the possible impact of a VAT case relating to a commercial care home provider.
The zero rate for acquiring or constructing relevant residential or relevant charitable buildings is subject to a self-supply adjustment, often called a ‘clawback’, when the qualifying use changes or the building is disposed of, within the ten-year time limit. The case of Balhousie (UKUT0410) deals with the criterion related to the disposal of the building.
In their case the building was sold on a ‘sale & leaseback’ basis, such that the interest they held was effectively exchanged for a rental lease. This was merely a financing manoeuvre which was not intended to change either the use of the property or their specific use or involvement. HMRC said that the disposal of the property to the new ultimate owner triggered the clawback and that VAT was due (which could not be recovered because they make exempt supplies). The First Tier Tribunal Tribunal allowed the taxpayer’s appeal on the basis that, for the clawback to apply, the entire interest had to be disposed of, whereas the leaseback arrangement meant that a considerable interest remained.
But the Scottish Upper Tribunal has rejected that analysis and confirmed that a clawback applies. This was because the sale should be viewed in isolation from the leaseback. *Update*: In February 2019 the Court of Session dismissed the appeal by Balhousie, upholding the decision of the Upper Tribunal. This decision was subsequently reversed by the Supreme Court in March 2021, in favour of Balhousie.
How might this apply to a charity? Basically, the same rule applies, but to both relevant residential and relevant charitable buildings. It seems less likely that charities will engage in financing deals involving sale and leaseback, but they might. In particular, a charity that builds a care home which charges fees for care may decide to sell and leaseback to get capital for its next development. In that sense it is no different to the commercial sector. This decision shows that this could be a fatal step. The ‘good news’ is that there are other ways of achieving a similar end without any disposal of the interest, so charities must take advice.
Graham Elliott is CTG’s technical advisor