Sale and leaseback for care home

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The Balhousie Holdings Ltd case was decided by the Scottish Court of Session early in 2019.

The facts are straightforward, and the decision clear. But I have some sympathy with the perceived unfairness of it.

The company had a care home built. Since this was a ‘Relevant Residential Purpose’ (RRP) property it issued a zero-rating certificate to the developer. So far, so good.

A few years later, in order to raise finance, the company entered into a sale and leaseback agreement with a specialist investment company (Target Healthcare REIT). The terms of the agreement required that the property would continue to be used by Balhousie as a care home. HMRC ruled that the sale to the third party constituted a ‘change of use’ as envisaged by Sch 10, paras 35-37, resulting in a self-supply charge of around £800,000. The ‘unfairness’ arises because the actual use of the property did not change. It continued to be used as a care home by the same company. The output tax of £800,000 was irrecoverable, since the company made exempt supplies.

The Court of Session, following the Tax Tribunals, held that the sale and leaseback should be regarded as two distinct transactions, even though they were entered into simultaneously. Para 39 of the CS decision explains this with cold logic.

I am concerned that HMRC Internal Guidance suggests that a change in ownership but no change in use should not result in a self supply charge. See their guidance at VCONST21400. The Court commented that this manual is not a binding or authoritative statement of law.

Check out the CS decision here:[2019]_CSIH_7.html 


About Les Howard


Hi, I am a VAT Consultant, working mainly with charities. I am based in Cambridgeshire

I have over 20 years experience in VAT, and am currently also a part-time member of the Tax Tribunals.


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27th Feb 2019 13:04

Two things. These bear traps should not exist in UK tax legislation in the 1st place (see Lobler for a similar example) and HMRC should use their discretion not to pursue such bear trap tax (where there is absolutely no tax avoidance motive whatsoever and the tax arises merely from very stupid and illogical rules that can catch and financially ruin totally innocent people as in this case and Lobler).

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