Balhousie Holdings Ltd v Commissioners for HM Revenue and Customs
| Jurisdiction | Scotland |
| Judgment Date | 07 February 2019 |
| Neutral Citation | [2019] CSIH 7 |
| Docket Number | No 20 |
| Date | 07 February 2019 |
| Court | Court of Session (Inner House) |
[2019] CSIH 7
Second Division
Upper Tribunal (Tax and Chancery Chamber)
Revenue — Value added tax — Taxable and exempt supplies — Zero-rated supply of residential buildings — Whether a sale and leaseback amounted to a disposal of the taxpayer's entire interest in the relevant buildings — Value Added Tax Act 1994 (cap 23), sch 10, para 36(2)
Section 30(2) of the Value Added Tax Act 1994 (cap 23) (‘the 1994 Act’) provides that a supply of goods or services of a description specified in sch 8 to the Act is zero-rated. Group 5 of sch 8 relates to the construction of buildings, of which item 1 is: “The first grant by a person– (a) constructing a building– … (ii) intended for use solely for a relevant residential … purpose; … of a major interest in, or in any part of, the building, dwelling or its site.” Note (4)(b) to group 5 provides that use for a relevant residential purpose includes use as “a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement”. Section 96(1) defines “major interest” in relation to land in Scotland as “the interest of the owner, or the lessee's interest under a lease for a period of not less than 20 years”. Part 2 of sch 10 to the Act applies in respect of the making of “relevant zero-rated supplies relating to a building” (para 35(1)). Where the person to whom such a supply was made, P, “has, since the beginning of the relevant period, disposed of P's entire interest in the relevant premises” (para 36(2)) or the relevant premises “are … being used for a purpose that is neither a relevant residential purpose nor a relevant charitable purpose” during that period (para 36(3)), the supply may be taken to be “a taxable supply which is not zero-rated” as a result of group 5 of sch 8 (para 37(2)). The value of the taxable supply is calculated according to the formulae set out in para 37(3). For this purpose, a “relevant zero-rated supply” is “a grant or other supply which relates to a building … intended for use solely for– (a) a relevant residential purpose … and which, as a result of Group 5 of Schedule 8, is zero-rated (in whole or in part)”; “relevant premises” means “the building … in relation to which a relevant zero-rated supply has been made to P” and “relevant period” means “10 years beginning with the day on which the relevant premises are completed” (para 35(2)). Where P is a person treated as a member of a value added tax (‘VAT’) group, references to P include reference to any member of that group (para 35(3)).
The appellant (‘the taxpayer’) was a company that carried on business as an operator of care homes, and was a member of a VAT group including Faskally Care Home Ltd (‘Faskally’) and Balhousie Care Ltd (‘Balhousie Care’). In about 2010, the taxpayer decided to construct a new care home on land belonging to Faskally in Huntly, Aberdeenshire. After the building was completed, it was acquired by Balhousie Care as a zero-rated supply in terms of item 1 of group 5 of sch 8 to the 1994 Act. In March 2013, in order to finance the acquisition, Balhousie Care sold the property to Target Healthcare REIT (‘Target’) and immediately thereafter leased it back from Target, and continued to use it as a care home.
On 24 June 2014, the respondent (‘HMRC’) decided that the taxpayer as representative of the VAT group was liable to a VAT charge in consequence of the disposal of the care home to Target. On 9 February 2015, HMRC intimated a notice of penalty assessment in consequence of its decision on the VAT liability.
On 31 May 2016, the First-tier Tribunal (‘FTT’) allowed the taxpayer's appeals against HMRC's decisions. On 20 October 2017, the Upper Tribunal (‘UT’) reversed the FTT's decision and upheld HMRC's appeal.
The taxpayer argued that the sale and leaseback should be treated as a single transaction which did not amount to a disposal of Balhousie Care's entire interest in the relevant premises because its effect was to leave Balhousie Care with the lease of the property from which it continued to carry on the business of a care home.
HMRC argued that the relevant transaction was the sale and disposition of the property to Target, and that the leaseback was a distinct transaction and therefore immaterial.
Held that: (1) it was the form and nature of the individual transaction chosen by the taxpayer, analysed objectively, that was subject to VAT, it being irrelevant that a similar result could have been reached by structuring the transaction in a different way (paras 19, 21, 22); (2) the purpose of paras 35 to 37 of sch 8 to the 1994 Act was to prevent the potential abuse of zero-rated supplies of residential property and care homes by their conversion and acquisition as commercial property, those provisions applied separately to disposal of the taxpayer's interest and to change of use of the property, so that any disposal of the entire interest in relevant premises would trigger a self-supply charge calculated in accordance with para 37 (paras 27–29, 34, 37); (3) there were sound reasons for imposing a self-supply charge upon mere disposal without change of use under para 36(2) as any subsequent change of use by the transferee would be outwith the taxpayer's control (para 29); (4) a sale and leaseback transaction involved the disposal of the original owner's heritable interest in the property, albeit in exchange for a lesser heritable interest in the form of a lease, in the event of termination of which the original owner could no longer control the use of the property (paras 31, 33); (5) the assumption implicit in the formulae dealing with the calculation of the self-supply charge under para 37, that the taxpayer had held the property or part thereof throughout the relevant period, supported the view that para 36(2) should be applied in a straightforward fashion to deal with any disposal of the taxpayer's entire interest in the property (para 32); (6) in the present case, considered objectively, the sale and leaseback served different purposes and were to be regarded as two separate transactions as a matter of substance and the intention or purpose of Balhousie Care in entering the transactions was irrelevant (paras 39, 40); (7) the sale of the property to Target divested Balhousie Care of its entire interest in the property, and para 36(2) therefore applied (para 41); and appeal refused.
Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes) [2005] 1 AC 684 considered and BLP Group plc v Customs and Excise Commissioners[1995] ECR I-983 and Halifax plc v Customs and Excise Commissioners[2006] ECR I-1906applied.
Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes) [2004] UKHL 51; [2005] 1 AC 684; [2004] 3 WLR 1383; [2005] 1 All ER 97; [2005] STC 1; 76 TC 446; [2004] BTC 414; [2004] STI 2435
BLP Group plc v Customs and Excise Commissioners (C-4/94) EU:C:1995:107; [1995] ECR I-983; [1996] 1 WLR 174; [1995] STC 424; [1995] 2 CMLR 750; [1995] All ER (EC) 401; [1995] BVC 159
Customs and Excise Commissioners v Robert Gordon's College 1996 SC (HL) 6; 1996 SLT 98; [1996] 1 WLR 201; [1995] STC 1093; [1995] EG 179; [1995] NPC 178
Halifax plc v Customs and Excise Commissioners (C-255/02) EU:C:2006:121; [2006] ECR I-1609; [2006] Ch 387; [2006] 2 WLR 905; [2006] STC 919; [2006] 2 CMLR 36; [2006] CEC 690; [2006] BTC 5308; [2006] BVC 377; [2006] STI 501
Ramsay (WT) Ltd v Inland Revenue Commissioners [1982] AC 300; [1981] 2 WLR 449; [1981] 1 All ER 865; [1981] STC 174; 54 TC 101; [1982] TR 123; (1981) 11 ATR 752
Stamp Revenue (Collector of) v Arrowtown Assets Ltd [2003] HKCFA 52; [2004] 1 HKLRD 77; [2003] 6 HKCFAR 517
UBS AG v Revenue and Customs Commissioners [2016] UKSC 13; [2016] 1 WLR 1005; [2016] 3 All ER 1; [2016] STC 934; [2016] BTC 11; [2016] STI 513
Balhousie Holdings ltd appealed against decisions of the Commissioners for Her Majesty's Revenue and Customs that it was liable to a VAT charge and penalty assessment in consequence of a disposal of care home premises. On 31 May 2016, the First-tier Tribunal (Tax Chamber) (Judge Gemmell and Judge Shearer) issued a decision allowing the appeals ([2016] UKFTT 377 (TC)). An appeal against the decision of the FTT called before the Upper Tribunal (Tax and Chancery Chamber) (Lady Wolffe), on 24 April 2017. On 20 October 2017, the UT issued a decision allowing the appeal ([2017] UKUT 0410 (TCC)). The taxpayer appealed to the Court of Session.
Revenue and Customs (HM), Internal Manual VAT Construction (HMRC, London, March 2016), VCONST21500 (Online: https://www.gov.uk/hmrc-internal-manuals/vat-construction/vconst21000 (29 March 2019))
The cause called before the Second Division, comprising the Lord Justice-Clerk (Dorrian), Lord Drummond Young and Lord Doherty, for a hearing on the summar roll, on 30 October 2018.
At advising, on 7 February 2019, the opinion of the Court was delivered by Lord Drummond Young—
Opinion of the Court— [1] Schedule 8 to the Value Added Tax Act 1994 (cap 23) (‘the 1994 Act’) provides for the zero-rating of certain forms of supply. In that schedule, item 1 of group 5 applies zero-rating to the first grant by a person constructing a building intended for use solely for a relevant residential purpose of a major interest in the building. Use of a building as a care home counts as a relevant residential purpose. Where, however, the person to whom such a supply has been made disposes of its entire interest in the property or changes the use of the property to non-residential within a period of ten years from the date of completion of the premises, paras 35 to 37 of sch 10 to the 1994 Act in effect reverse the benefit of zero-rating for that person, by providing that the original supply is to be treated as a taxable supply that is not zero-rated. This is achieved by...
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