This is great news for owners and operators of new relevant residential properties (such as care homes and student accommodation) and certain properties used for a relevant charitable purpose.
When these properties are first constructed, they qualify for a zero-rating. This is normally an absolute saving for the owners or operators as they are unlikely to be entitled to recover most of the VAT they incur.
However, where the construction costs have been zero-rated, there is a self-supply charge that can be can retrospectively applied where there is a dispose or change of use of the zero-rated building within 10 years of its completion. This can effectively reverse some or all the VAT savings and result in a significant payment of VAT to HM Revenue & Customs (HMRC).
Many owners and operators of these buildings will enter into sale and leaseback arrangements in order to fund the construction of the property or fund possible future construction projects. HMRC saw these arrangements as disposals and, in the case of Balhousie Care, sought to recover over £800k of VAT and interest payments.
Balhousie appealed to the VAT tribunal way back in 2016 and the case was finally decided by the UK Supreme Court when it issued its decision on 31 March 2021. It ruled in favour of the taxpayer with all five judges agreeing that the VAT charge only applied to a disposal when the taxpayer was left with no interest in the property.
While Balhousie had disposed of its freehold interest, it had simultaneously taken back a 30-year leasehold interest and continued to operate the property as a care home. There was in effect no moment in time when Balhousie had no interest in the property. As a result, the assessment of VAT triggered by the self-supply rules did not apply.
This is long-awaited good news for those organisations that have used leaseback arrangements to finance new residential or charitable buildings. As this is now settled case law, HMRC cannot appeal further.
HMRC has not yet commented on the practical implications of this decision. However, charities, care homes and other organisations in similar circumstances (including some schools and universities) should be reviewing their arrangement to ensure they fall in line with the Balhousie decision and are not susceptible to challenge by HMRC.
Would you like to know more?
If you would like to discuss any of the above guidance, please get in touch using the contact details to the right or through your usual Blick Rothenberg contact.
For any press queries, please contact David Barzilay whose details are to the right.