UK: 
USA:
Following the case of Balhousie Holdings Ltd 2021, which took place in the Supreme Court earlier this year, HMRCHis Majesty's Revenue and Customs is a non-ministerial department of the UK Government responsible for the collection of taxes. has issued important revisions to its policy on when the construction VAT self-supply charge will arise in sale and leaseback situations.
What happened in the Balhousie case?
The landmark case stems from Balhousie Care Ltd’s purchase of a newly-constructed care home that it obtained a zero-rating on. As part of its plan to fund the investment, it agreed a simultaneous sale and leaseback arrangement with Target Healthcare REIT. It went on to receive a long lease back and operated the property as a care home without interruption.
Zero-rating is typically applied to the purchase or construction of a property when it is accepted that it will be used for a ‘qualifying’ purpose; in this case, a care home. But such properties can also be liable to a VAT self-supply charge.
The self-supply charge is essentially a mechanism that allows the zero-rating to be redeemed by the authorities if there is a change in its use, i.e. it moves away from a qualifying purpose to become a non-qualifying property. This also applies if the company’s ‘entire interest’ in the building is disposed of within 10 years.
In such a case, the self-supply charge is calculated from the date when the property becomes non-qualifying or when the entire interest is disposed of. VAT will then be due to the tax authority on the months remaining within the 10-year term.
In the case of Balhousie, the Supreme Court adjudicated that the sale and leaseback did not symbolise the disposal of its entire interest in the care home.
This was because the simultaneous nature of the sale and leaseback meant that Balhousie Holdings Ltd had an interest in the property at all times; either as its owner or as the lessee without interruption. In short, there was no break in the use of the building as a care home.
What does HMRC now advise for the VAT self-supply charge?
Following the Balhousie Holdings verdict, the new guidance from HMRC states the disposal of an entire interest in a property has not taken place to allow the VAT self-supply charge to be triggered when the following conditions are met:
- The purchase of a qualifying property has been completed.
- Upon the sale of the property, an immediate lease kicks in with no time lapse.
- The lease runs for the remaining term of 10 years from the original purchase date or longer.
- The property is being used or operated for a qualifying purpose.
And if those conditions are not met?
In cases where the above conditions are not met, the sale of the property in question or the relinquishing of the lease will be subject to the VAT self-supply charge. This is because the entire interest within the property will be deemed by HMRC to have been disposed of within the 10-year period.
What do you need to do?
Organisations operating buildings deemed to be qualifying properties – such as those in the care home, NHS or charities sectors – that are planning to enter into a sale and leaseback arrangement should review the new HMRC conditions to ensure they do not face a self-supply charge.
It is also advisable to monitor the use of the building so that if its qualifying status changes for any reason, the self-supply charge can be applied at the right time.
