Balhousie Holdings Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 31 May 2016 |
| Neutral Citation | [2016] UKFTT 377 (TC) |
| Date | 31 May 2016 |
| Court | First-tier Tribunal (Tax Chamber) |
Judge Ruthven Gemmell WS, Ian G Shearer
Philip Simpson, QC, appeared for the appellant
Elisabeth Roxburgh, Advocate, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Zero-rating of new residential development – Self-supply charge – Whether a sale and lease back had disposed of an entire interest – No – Value Added Tax Act 1994 (“VATA 1994”), Sch. 10, para. 36 – Company's appeal allowed.
The First-tier Tribunal (FTT) allowed the appeal against HMRC's decision that Balhousie Holdings Ltd (“BH”) was liable to a self-supply charge, following its disposition of a care home.
BH operated care homes and formed a VAT group with its subsidiaries, including Balhousie Care Ltd (“BC”). BH's subsidiary FC, having originally operated a care home, which was then sold to BC, was not part of the VAT group. FC provided project management services, including managing the “design and build” of new buildings, as well as dealing with extensions and/or refurbishments of existing buildings. FC was used for this purpose in order to recover input VAT incurred on professional fees, which would have been heavily restricted if BH or anyone within the VAT group sought to recover it, because they were partly exempt.
BH constructed three care homes: Monkbarns in Arbroath, St Ronan's in Dundee and Deveron Way, in Huntly (“the three properties”). The land, and subsequently the new home at Huntly, belonged to FC and after its completion it was acquired by BC. There were difficulties with obtaining bank finance, so selling properties and leasing them back (“sale and lease back”) was adopted for Monkbarns, St Ronan's and Huntly. This arrangement was entered into on 8 March 2013 in respect of all three properties, which by that time were owned by BH's subsidiary BC, with Target Healthcare REIT (“Target”). BC already occupied the three properties and had been for months before the sale and lease back.
On 5 March 2014, HMRC wrote to BH's advisors Grant Thornton about the VAT treatment of the properties purchased by BH from FC, including a newly completed care home in Huntly. This purchase was treated as a zero-rated first grant of a major interest in a relevant residential property. The letter continued:
In order for this treatment to be correct BH must have – before the purchase had been made – provided a certificate to FC confirming that they intend to use the property solely for a relevant residential purchase. Without the required certification this disposal should have been treated as standard rated for VAT purposes by FC. If, however, the appropriate certificate was issued, any further disposal of the property by BH within 10 years of practical completion would make them liable to a change of use “self-supply” charge – on which they must account for VAT at the standard rate. It is understood that the Huntly property has since been sold to Target. Any self-supply charge due would be calculated based on the value of the original zero-rated first grant.
It was agreed that the required certificate existed and that the first sale of Huntly by FC to BC was correctly zero-rated.
BH argued that:
1) the sale would not have happened without the lease back; and
2) it had retained an interest in the property.
HMRC disagreed with Grant Thornton's view that, due to the associated lease back, the onward sale to Target did not result in BC becoming liable to a self-supply charge, in relation to the zero-rated supply (with the required certificate) received from FC. HMRC saw the sale and lease back as separate transactions, i.e. the sale of the property by BC to Target and the 30-year lease granted by Target to BC.
HMRC referred to the disposition of the Huntly property, which they said confirmed that BC had disposed of its entire interest in the property to Target. Then BC regained an interest in the property, by entering into a long lease with Target. It continued “However irrespective of any time factor occurring between those transactions, they are still separate transactions for VAT purposes and must be accounted for accordingly”.
BH argued that it did not dispose of its entire interest in the Huntly property by means of the sale and lease back entered into by BC and Target on 8 March 2013 within Sch. 10, para. 36 (para. 30 of the decision).
The FTT considered that the ordinary and literal meaning of the words “dispose of P's [the taxpayer as defined at Sch. 10, para. 35(1)] entire interest”, as in Sch. 10, para. 36(2), required a taxpayer to relinquish every interest in the property. However, this had not happened with the sale and lease back (para. 66 of the decision).
The contract between BC and Target provided for a contemporaneous sale, evidenced by a disposition, and a lease. These obligations were reciprocal and created a mutuality of contract, being a single transaction in the same document (para. 68 of the decision).
The FTT considered Parliament's intention if use changed, so that zero-rating was no longer appropriate. The FTT held that, not only was the building still being used for a relevant residential purpose, it was still being so used by the person who first acquired it, so there was no VAT avoidance (para. 73 of the decision).
With a purposive interpretation of para. 36(2), the FTT held that an “entire interest” was not disposed of by the sale and lease back (para. 75 of the decision).
In allowing the appeal by the company, the FTT held that the sale and lease back was a composite transaction (para. 77 of the decision).
The legislation aimed to ensure that use of the building continued for relevant residential purposes. The FTT did not consider that policing of such use was required, as BH was still responsible for using the building. Its use, before and after 8 March 2013, was the same. The requirement for VAT to be accounted for on the original supply as output tax applied only if the taxpayer disposed of his entire interest in the premises within ten years of the supply. If BH had been liable to a self-supply, the VAT due would have been the amount that would have been chargeable on the zero-rated supply, i.e. the purchase of the property by BC from FC. HMRC estimated that charge at £801,492.
[1] Balhousie Holdings Limited (“BH”) appealed against a decision by HMRC by letter dated 24 June 2014, upheld on review by letter dated 29 October 2014, (the “Review Decision”) that BH was liable to a VAT self-supply charge arising from the disposition of Huntly Care Home to Target Healthcare REIT Ltd on 8 March 2013, and a penalty assessment dated 9 February 2015 in respect of the Review Decision. A further appeal TC/2015/03401 in respect of an alternative decision by HMRC was withdrawn at the request of BH and HMRC. These appeals were considered alongside appeals by one of BH's subsidiaries, Faskally Care Home Limited (“FC”) TC/2014/06479 and TC/2015/02414, which are the subject of a separate judgement.
[2] BH operates 25 care homes mostly in the north east of Scotland and forms a VAT group with its subsidiaries Balhousie Care Ltd (“BC”), Dalnaglar Care Homes Ltd, Glencare (Scotland) Ltd and ARB Properties Scotland LLP. BH's subsidiary FC having originally operated a care home which was then sold to BC was not part of the VAT group and was during the relevant period utilised to provide project management services including the managing of the design and build process of new buildings as well as dealing with extensions and/or refurbishments of existing buildings. FC was, based on professional advice, used for this purpose in order to recover input VAT incurred on professional fees which would have been heavily restricted if BH or anyone within its VAT group sought to recover it, because they were partly exempt for VAT purposes.
[3] The Tribunal had before them seven bundles of productions, including agreements between FC and contractors submitted on the day of the hearing (the “new documents”) and skeleton arguments. HMRC objected to the submission of the “new documents” which were accepted by the Tribunal but viewed in the context of that objection as having been unseen previously by HMRC. Within the bundles were witness statements of Anthony (Tony) Banks (“TB”), Chief Executive and Proprietor of BH, Scott Whittet (“SW”), consultant to and then initially the sole employee of FC, and John Shearer (“JS”), a Higher Officer of HMRC in the Tax Avoidance and Partial Exemption Team, all of whom gave evidence and were examined and cross-examined; and witness statements from and confirmed by Kirsty Drummond, a Higher Officer of HMRC, on which there was no examination or cross-examination. All the witnesses were credible.
[4] See Appendix 1.
[5] See Appendix 2.
[6] TB founded the Balhousie Care Group in 1991 and has been actively involved in its management and growth. About 2010 BH decided to construct three new care homes; Monkbarns in Arbroath, St Ronan's in Dundee and Deveron Way, in Huntly (“the three properties”). The land and subsequently the new home at Huntly belonged to FC and after its completion it was acquired by BC. In view of the difficulties, at that time, of obtaining bank finance a previously used mechanism of selling properties and leasing them back (“sale and lease back”) was adopted for Monkbarns, St Ronan's and Huntly. This funding model was said to provide funding for growth and to allow BH to focus on its core capabilities of providing care.
[7] This arrangement was entered into in March 2013 in respect of all three properties, which by that time were owned by BH's subsidiary BC, with Target Healthcare REIT (“Target”) and missives were concluded by means of an offer on behalf of Target dated 8 March 2013 and accepted on an unqualified basis by BC on the same day. The consideration for the sale was...
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Revenue and Customs Commissioners v Balhousie Holdings Ltd
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