Supreme Court rules on care home VAT lease backby
Les Howard considers a Supreme Court decision that hung on the judges’ interpretation of non-technical wording in an apparently simple provision in the 1994 VAT act.
There has been an interesting development in regard to the VAT consequences of sale and lease back arrangements to raise finance in the case of Balhousie Holdings Ltd.
Brought to the UK’s highest court following a 2019 decision in the Scottish Court of Session, the appeal concerned a “self-supply” where the taxpayer had sold and leased back a £4m nursing home in 2013 to raise finance.
Though its initial assessment and subsequent court challenges, HMRC held that the taxpayer had changed the use of the property from a relevant residential purpose (RRP) to trigger a self-supply charge. Output tax of around £800,000 was due, which was irrecoverable, since Balhousie’s onward supplies were exempt.
The issue previously made it to the European Court of Justice (ECJ) in the case of Mydibel SA, a Belgian chip manufacturer (potato variety, not computer), which sold and leased back one of its commercial buildings.
Two transactions become one
The ECJ commented that where such transactions “are purely financial transactions designed to increase Mydibel’s liquidity” and the buildings in question continue to be used for the same purpose, the two transactions form a single transaction for VAT purposes. This followed the thread of cases back to Card Protection Plan, which considered a number of supplies packaged as a single whole.
The UK Supreme Court has applied the Mydibel ruling. The court held that the sale was only part of the transaction, which included the lease back. The two elements were so closely linked that they must form a single indivisible transaction. There was also no change of use, since Balhousie continued to provide care from the property.
HMRC do not agree with that conclusion! And, as far as I know, HMRC has not issued a Brief on either Mydibel or Balhousie Holdings Ltd.
Implications for taxpayers
The consequences for taxpayers will be quite varied. Finance companies involved in such transactions may have to unpick agreements and seek revocation of options to tax.
Trading companies which enter into sale and lease back arrangements will exclude the value of those transactions from their supplies, as the money raised should be treated as additional capital income.
Input tax incurred on the sale and lease back will be treated as residual if the taxpayer is partially exempt. Such input tax relates to its general trading activities, perhaps in the property in question.
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Hi, I am a VAT Consultant, part of the team at vatadvice.org We are based in Cambridgeshire. We work largely with charities but also advise a range of commercial organisations.
I have over 30 years experience in VAT, and am currently also a part-time member of the Tax Tribunals.