Change in the treatment of the construction VAT self-supply charge
HMRC has revised its policy on the meaning of ‘entire interest’ in relation to the VAT self-supply charge.
A zero-rating of VAT is available on four classes of supplies made in connection with the construction or conversion of buildings intended to be used for relevant residential or charitable purposes, including use as a care home, children’s home, student accommodation, monasteries, boarding schools (the accommodation part only), army accomodation etc.
However, a claw-back can arise via a self-supply charge where, within 10 years, the taxpayer disposes of their entire interest in the property, or there is a change of use of the building.
This area of VAT has recently been the subject of a judgement in the Supreme Court following a sale and leaseback of a recently constructed care home where HMRC sought to apply the self-supply charge (Balhousie Holdings Ltd v Commrs for HMRC  UKSC 11).
The facts of the case
In March 2013, Balhousie Care Ltd bought a care home at the zero rate of VAT. To finance the acquisition and further developments, they entered into a sale and leaseback arrangement with Target Healthcare REIT. As a result of that arrangement, Balhousie Care conveyed the land to Target, and Target simultaneously granted the land on a long lease back to Balhousie. The premises continued to operate as a care home without interruption.
When a property has been purchased or constructed at the zero rate of VAT, with a certificate stating that it will be used for a relevant residential or relevant charitable purpose, the property may be liable to a self-supply charge if there is a change in use or the entire interest is disposed of within a 10-year period. The 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 the case of Balhousie, the Supreme Court looked at the meaning of the disposal of the ‘entire interest’ in the property. Balhousie had a sale and leaseback arrangement where Balhousie continued to operate the premises for a relevant residential purpose throughout the transaction.
In Balhousie, the Supreme Court ruled that the sale and leaseback of the care home did not account for the disposal of the ‘entire interest’ in the property because the simultaneous sale and leaseback meant that Balhousie always had an interest in the property either as owner or lessee without interruption.
HMRC revised policy
HMRC has now revised its policy and considers that a disposal of an ‘entire interest’ will not occur when the following four conditions are all met:
- A qualifying property must have been purchased
- When the property is sold, there must be an immediate lease in place, which is a seamless transaction with no time lapse
- The lease must be for the remaining term of the ten years from the original purchase date, or longer
- The property must be continually used or operated for a qualifying purpose, meaning the business suffers no break in trade during the sale and leaseback
If the above conditions are not met, the sale of the property or the giving up of a long lease within the ten-year period will be subject to the self-supply charge for the remaining term.
Businesses that own care homes, and are considering a sale and leaseback, or other structure where the interest in the property is disposed of, should seek VAT advice to ensure that the VAT implications of the structure are understood during the planning stages to avoid unintended (and costly!) consequences.
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The information was correct at time of publishing but may now be out of date.