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Balhousie case: Supreme Court rules on self supply


In a second piece explaining the Supreme Court’s decision in the Balhousie Holdings case, Les Howard considers the ramifications concerning VAT change of use and self supply rules in the sale and lease back of a residential care home.

17th May 2021
VAT Consultant
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The Supreme Court decision in Balhousie Holdings was notable for two reasons. This article focuses on the court’s interpretation of the rules concerning changes of use that can trigger the application of standard rate VAT where there is a self-supply within 10 years.

The previous article examines the court’s logic in determining whether Balhousie’s sale and leaseback arrangement on its care home in Huntly, Aberdeenshire, was a single transaction or not.

Self-supply clawback

On the issue of change of use and self supply, advisers will be aware that when a taxpayer benefits from a zero-rated supply in relation to RRP (relevant residential purpose) or RCP (relevant charitable purpose) construction or conversion, any change of use within 10 years triggers a clawback or, more accurately, a self-supply.

The self-supply is standard rated. Output tax is due on the value of the self-supply. If the taxpayer is not registered for VAT, the value of the self-supply may trigger a requirement to register.

In some circumstances, the taxpayer can opt to tax, for example, and recover the output tax charged, leaving no overall loss of tax. But as in this case, where supplies are exempt, the output tax charged cannot be recovered.

Was sale and lease back a “disposal”?

As Balhousie’s QC Philip Simpson noted in his analysis of the result, zero-rating would be withdrawn if the purchaser “disposed of its entire interest” in the care home within the 10-year window. The appeal was based on convincing the judges of the appellant’s assertion at the first tier tribunal that the sale element of the sale and leaseback did not count as the disposal of the taxpayer’s entire interest in the care home.

The Supreme Court undertook an analysis of these provisions, which would benefit any budding VAT adviser trying to understand this obscure rule.

The key point is how Sch 10, para 36(2) of the Value Added Tax Act 1994 is to be understood. Did the taxpayer dispose of its “entire interest” in the property if the sale and lease back took place simultaneously?

Balhousie’s representatives argued that once that transaction was complete, the company still occupied and traded from the same premises, so it had not disposed of its interest in the property.

The Mydibel principle

The court’s view was reinforced by a consideration of the ECJ decision in Mydibel SA.

In paragraphs 47–62 of the judgment, Lady Arden explained the relevance of this decision. Paragraph 55 is crucial here: where the sale and lease back occur for funding purposes, the normal analysis is overridden by what we might call the Mydibel principle, such that the correct analysis is that there is a single supply for VAT purposes.

Since Balhousie continued to provide care services from the property, there was no change of use, and so no self-supply charge was triggered.

Care providers and charities who have suffered self-supply charges should review their VAT Returns. Where necessary, they can appeal HMRC assessments under Sch 10.

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