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VAT Brief 13/2021 is essential reading for charities and care home operators following the Balhousie decision
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VAT update: Sale and leaseback of residential buildings

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HMRC published new guidance on how to treat the sale and leaseback of residential buildings - a must-read document for operators of care homes and the charitable sector.    

29th Oct 2021
VAT Consultant vatadvice.org
Columnist
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HMRC has issued Brief 13/2021 in response to the Supreme Court decision in Balhousie Holdings Ltd, which we analysed in a two part series in April and May of this year.

What is zero-rated?

Zero-rating applies to the construction of a new building for “relevant residential purpose” and for “relevant charitable purpose”. Where the recipient disposes of the building within 10 years from completion, a self-supply charge is triggered.

In the case of Balhousie, the disposal occurred by means of sale and lease back arrangement, in order to raise finance for the on-going operation of the care home. Fairness would insist that such an arrangement does not trigger the self-supply charge. HMRC thought otherwise, but the Supreme Court disagreed!

What does HMRC say?

The HMRC Brief 13/2021 makes two points, one of which is contentious, the other helpful.

HMRC still views a sale and leaseback as two separate transactions. Brief 13/2021 adds that the Supreme Court did not revisit this point. In contrast, the Supreme Court considered the ECJ decision of Mydibel [2019] STC 1342. The European Court held that in the context of a sales and leaseback for funding purposes, those two otherwise separate transactions are properly treated as a single transaction.

The second point raised by the new VAT brief is more helpful. HMRC now allows that as long as four conditions are met, a sale and lease back will not be considered to be a disposal of an entire interest in the property and so no self-supply is triggered.

The four conditions are:

  • A qualifying property has been purchased, ie a property to be used for a relevant residential or charitable purpose
  • When the property is sold, the lease back must be immediate. This is clear in the Balhousie decision.
  • The subsequent lease must cover at least the remaining portion of the 10-year period.
  • The use of the property after the sale must be for the original “qualifying purpose”.

Motive test?

However there is no explicit reference to the motive for the sale and leaseback.

Whilst we would expect most instances to be for the purpose of raising finance, it may be that the sale and leaseback has some other purpose.

Additional points

There are some other fine points which advisers might note.

The HMRC brief essentially modifies its existing guidance, found in the VAT construction manual at VCONST21400. This explains that the key test is the “occupational or physical use” of the property. So, where the property continues to be used for a qualifying purpose, a self-supply does not arise. It seems HMRC failed to apply this guidance in the Balhousie case, although I understand this guidance had generally been applied in practice.

The Balhousie decision addresses whether the taxpayer purchases a property with VAT applied at the zero-rate. The self-supply legislation in Sch 10 of VAT Act 1994 also references the situation where the taxpayer has a building constructed at the zero-rate. Brief 13/2021 does refer to both circumstances. So, where the taxpayer has a building constructed for its qualifying activity, this guidance will apply.

Charitable sector

There is another scenario which Brief 13/2021 does not explicitly address, but which I have come across in the charitable sector.

Many charities are changing their legal status, for example, from an association to a community interest organisation (CIO). Where the change of status involves the transfer of a property, the transferor is disposing of the property.  However, the qualifying use continues without any time lapse, since the transfer from association to CIO occurs on the same day. Although the Brief 13/2021 does not address this specific circumstance, I am confident that no self-supply charge can arise in this situation.

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