HMRC revises its policy on when the construction VAT self supply charge will arise in sale and leaseback situations (RCB 13 2021)

Why has HMRC’s policy been revised?

HMRC’s revised policy stems from the Supreme Court decision of 31 March 2021 in the case of Balhousie Holdings Ltd. Balhousie Care Ltd had obtained zero rating on the purchase of a newly constructed care home from a developer and to finance the purchase/its further development, entered into a simultaneous sale and leaseback arrangement with Target Healthcare REIT. Accordingly, Balhousie Care Ltd received a long lease back interest and continued to operate the property as a care home without interruption.

Normally, when zero rating has been applied to the purchase or construction of a property based on a certificate having been issued to state that it will be used for a ‘qualifying’ relevant residential (such as a care home) or relevant charitable purpose, that property may be liable to a self-supply charge. This is effectively, a clawback of the original zero rating if there is a change in use from ‘qualifying’ to ‘non qualifying’ or if the entire interest is disposed of within a 10-year period. Such self-supply charge is calculated from the date when the change of use occurs or when the ‘entire interest’ is disposed of. VAT then becomes due on the remaining months within the 10-year period.

In Balhousie’s case, the Supreme Court decided that the sale and leaseback did not account for the disposal of its ‘entire interest’ in the property. This was because the simultaneous sale and leaseback meant that Balhousie Holdings Limited always had an interest in the property either as owner or lessee without interruption (i.e. there was no break in the operation of the property as a care home).

What is HMRC’s revised position?

As a result of the Balhousie decision, HMRC’s revised view is that there will not be disposal of an ‘entire interest’ in a property for the purpose of triggering the VAT self supply charge when all the following conditions are met:

• a qualifying property has been purchased;
• when the property is sold, there is an immediate lease in place, which is a seamless transaction with no time lapse;
• the lease is for the remaining term of the 10 years from the original purchase date or longer; and
• the property is continually used or operated for a qualifying purpose, meaning the business suffers no break in trade during the sale and leaseback

What happens if the above conditions are not met?

• If the conditions are NOT met, the sale of the property or the giving up of a long lease within the 10-year period will be subject to the VAT self-supply charge for the remaining term, as an ‘entire interest’ will be considered to have been disposed of in the property within the 10 year period.
• If contracts and/or financial projections do not factor in such potential additional VAT costs (payable by the purchaser) this may lead to cash flow as well as overall affordability issues. In addition, if the self supply charge is overlooked and not accounted for by HMRC, this could also result in associated penalties.

What will it mean for me/what do I need to do?

Organisations in the care home, NHS or charities sector and other businesses with relevant residential or relevant charitable property transactions who intend to enter into similar sale and leaseback arrangements should carefully review their position beforehand to ensure that all of HMRC’s conditions are being met to prevent a VAT clawback by way of a self supply charge unexpectedly arising.  The use of the property should also be continually monitored so that if any change of ‘qualifying’ use arises, any VAT self supply charge can be properly applied at the right time. In addition, contracts and financial calculations should factor in any potential VAT cost (and who will bear these) should a subsequent change of use occur to otherwise trigger a VAT self supply charge.

Next steps

Affected businesses should review their own positions in the light of HMRC’s revised policy to ensure that the correct VAT accounting position is applied. If you have any questions regarding your own situation, please contact us or your usual A&M VAT adviser.

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