The litigation in the case of Balhousie has reached its conclusion with a Supreme Court decision (2021 UKSC 11). This concerns the application of the ‘clawback’ provisions that apply where the construction or purchase of a new building was made on a zero rated basis, and the building is later disposed of, within the first ten years of life. I have already reported on this case at its First Tier and Upper Tribunal stages here. However, I will start this commentary by explaining its relevance to charities.
The case involved a commercial care home operator, but the rule for care homes is the same as for a zero rated charity building. The legislation creates a deemed supply VAT liability where a qualifying building is sold in the first ten years. Balhousie sold its care home, but only to raise finance to invest in similar developments, in ongoing care services, or to repay debt finance. It only sold on the basis of receiving a 30 year operating lease of the property. The sale & leaseback was a financing structure, pure and simple. In operational terms the care home remained a care home, and was to be operated by the same group that had purchased the property.
The deemed supply rule is triggered only by a disposal of the purchaser’s entire interest in the building. The first tribunal had said that the sale & leaseback was not an entire disposal, since the sale must be accompanied by a leaseback, and the two had to be regarded together before determining whether an entire disposal had occurred. It had not occurred according to the tribunal, because Balhousie retained an interest.
But the Upper Tribunal and Court of Session chose to split the single event into two separate parts, involving, first, a sale, and, then, a leaseback. By stopping the music before the second part of the transaction, these two courts determined that the entire interest had indeed been sold.
Happily, the Supreme Court saw this as a highly artificial interpretation of the statute. Any intelligent lay observer would say that the sale & leaseback had at no point involved the entire disposal of its interest by the care home operator. It describes HMRC’s arguments as ‘close to fanciful’. It says that the plain meaning of “entire” is inconsistent with the rationale of splitting the two stages asunder.
How the Upper Tribunal and Court of Session can have so seriously misread a case that the Supreme Court regarded as having an obvious answer (which the first tribunal had got right) is another question. However, this ultimate and unappealable result is that a sale & leaseback does not, after all, constitute a disposal such as triggers the relevant clawback legislation. (Charities are advised always to take professional advice where such transactions are envisaged, as the detailed implementation critically affects the tax result.)
Graham Elliott is Technical Adviser to the Charity Tax Group