Balhousie Holdings Ltd v Commissioners for HM Revenue and Customs

CourtSupreme Court (Scotland)
JudgeLord Sales,Lord Hodge,Lord Carloway,Lady Arden,Lord Briggs
Judgment Date31 Mar 2021
Neutral Citation[2021] UKSC 11

[2021] UKSC 11

Supreme Court

Hilary Term

On appeal from: [2019] CSIH 7


Lord Hodge, Deputy President

Lord Briggs

Lady Arden

Lord Sales

Lord Carloway

Balhousie Holdings Ltd
Commissioners for Her Majesty's Revenue and Customs
(Respondent) (Scotland)


Philip Simpson QC

Roger Thomas QC

(Instructed by Brodies LLP (Edinburgh))


Kieron Beal QC

Ross Anderson

(Instructed by Office of the Advocate General (Scotland))

Heard on 26 and 27 January 2021

Lord Briggs

( with whom Lord Hodge, Lord Sales and Lord Carloway agree)


This litigation raises what is, when all is said and done, a very short point of construction about the non-technical wording of an apparently simple provision in a taxing statute. Group 5 of Schedule 8 to the Value Added Tax Act 1994 (“ VATA”) provides for the zero-rating of four classes of supplies made in connection with the construction or conversion of buildings intended to be used for relevant residential or charitable purposes. One of those relevant residential purposes is use as a care home. The first of those zero-rated classes of supply is the “first grant” of a major interest in the building or its site by a person constructing or converting it for use for a relevant purpose. In Scotland, a “major interest” in land means the interest of its owner or the lessee's interest under a lease of not less than 20 years. Other classes include the supply of specified construction services and building materials to a person intending to use the building thereby constructed (or converted) for the relevant purposes.


Part 2 of Schedule 10 to VATA provides for what may loosely be described as a form of claw-back of the benefit of zero-rating from the recipient of the zero-rated supply or supplies (called “P” in the legislation) if either of two stated events occurs within ten years from the completion of the building (“the relevant period”). The first is, under paragraph 36(2), if P has, since the beginning of the relevant period, disposed of P's entire interest in the building. The second is, under paragraph 36(3), if there is a change of use of the building from a qualifying to a non-qualifying use. The happening of either of those events triggers what is called a “self-supply” charge to VAT, payable by P.


In the present case P is a company within the appellant's VAT group, Balhousie Care Ltd (“BCL”). It acquired a recently constructed care home in Scotland under a zero-rated first grant from the developer, and then financed that acquisition by a sale and leaseback of the building with a finance house. The question which has divided the parties and the courts below is whether the sale and leaseback constituted a disposal by BCL of its entire interest in the care home, so as to trigger a self-supply charge under paragraph 36(2).


Perhaps because of the large amount at stake (in excess of £800,000) this short question has become over-complicated by a large number of interesting but ultimately inconclusive arguments, such as whether there was a scintilla temporis between the sale and the leaseback, whether they were to be regarded for this VAT purpose as a single composite transaction or as two transactions, whether the VAT principle of fiscal neutrality applied, and whether the jurisprudence of the CJEU applied to the task of construction. There was also a perfectly proper search for the purpose behind paragraph 36(2) in a context unusually (but perhaps mercifully) free of admissible travaux préparatoires.


The language of paragraph 36(2) is simplicity itself. A self-supply charge is triggered:

“… if P has, since the beginning of the relevant period, disposed of P's entire interest in the relevant premises (or part).”

As already explained, P is a person to whom one or more relevant zero-rated supplies relating to a building (or part of a building) have been made: see paragraph 35(1). The relevant period is ten years beginning with the date of completion of the relevant premises. “Relevant premises” means the building (or part of a building) in relation to which a relevant zero-rated supply has been made to P: see paragraph 35(2). “Entire interest” is not defined, but it is clear from paragraph 37(1) that an interest includes a right or licence in the relevant premises. As is common ground, “interest” plainly includes a lease.


A reasonably intelligent and well-informed reader of paragraph 36 in its statutory context would be forgiven for thinking it tolerably clear that paragraph 36(2) would trigger a self-supply charge if, but only if, there came a time, during the relevant ten year period, when P no longer had any interest in the relevant premises, including any leasehold interest. If at a particular time P still had a leasehold interest, it could not have disposed of its entire interest. Since the irreducible essence of a sale and leaseback by P is that P ends up at the end of the process (to use a neutral word) with a lease, a sale and leaseback could not trigger a self-supply charge under paragraph 36(2) unless the process was so unwisely structured as to leave a gap in time between the completion of the sale and the taking effect of the leaseback.


This is how the matter appeared to the First-tier Tribunal. Having rejected HMRC's case that the particular sale and leaseback in issue created just such a moment in time, known to lawyers as a scintilla temporis, (when BCL had sold its ownership interest but had yet to receive its leasehold interest) it held that paragraph 36(2) had not been triggered. There was no time when BCL was neither the owner nor the lessee of the relevant premises. It had not therefore disposed of its entire interest in the care home.


HMRC has not thereafter pursued its case that there was such a moment in time. But it has pursued a case, successfully before the Upper Tribunal and the Inner House of the Court of Session, that the sale was, regardless of the leaseback, nonetheless a disposal of BCL's entire interest in the care home. This is principally because, viewed separately, the sale was a disposal of exactly the interest which BCL acquired by the zero-rated first grant from the developer. Once you match those two transactions, it was argued, paragraph 36(2) is triggered, regardless of anything which may happen during the period between them, or at the same time as the second of them.


Before becoming immersed in the complexities of the arguments each way, it is instructive to focus for a moment upon two examples of the surprising consequences of the way in which HMRC puts its case. First, take a case in which P first acquires an interest in a relevant care home building by a zero-rated first grant of a 21-year lease. A year later the ownership of the building (ie the real right of property) comes on the market and P buys it, (or in England the freehold reversion), so as to become the outright owner of the building. Five years later it grants an identical 21-year lease of the building to a care home operator but retains the ownership (the real right of property). On HMRC's case, paragraph 36(2) is triggered, because P has disposed precisely of the entirety of the (leasehold) interest which it acquired under the first grant. The continued right of ownership which P had later acquired would be ignored, as would the fact that, from year two until year six, the original lease had merged (by confusion with the property right) and been extinguished.


In the second example P, the owner of a disused mill which has been owned by his family for over a hundred years, decides to convert it into a care home and operate it to make a living, and receives numerous zero-rated supplies in connection with its conversion, but no zero-rated first grant of the mill itself. Within ten years after completion of the conversion he either sells the ownership and retains a lease, or leases the care home while retaining the ownership. Since there is no earlier zero-rated first grant with which the later sale or lease can be matched, how can it be decided, on HMRC's case, whether or not paragraph 36(2) is triggered? In this context it is important to note that Part 2 of Schedule 10 (of which paragraphs 36 and 37 are the main operative provisions) applies whenever there has been any kind of zero-rated supply or supplies in connection with the relevant building, not merely a zero-rated first grant of a major interest in it. They include the supply of specified construction or conversion services, and of building materials.


These two examples, and many others, suggest that there must be something wrong with any interpretation of the simple language of paragraph 36(2) which leads to a conclusion that P has disposed of P's entire interest in relevant premises when, in reality, P had at all material times an interest in it or a fortiori, as in the present case, a major interest in it.

The Facts

The appellant Balhousie Holdings Ltd is the representative member of a VAT group that includes BCL. Accordingly, any supplies made to or by BCL are treated as having been made to or by the appellant: section 43 of VATA. The Balhousie group, which includes companies outside the VAT group, owns and operates care homes in Scotland. The group (but not the VAT group) includes Faskally Care Home Ltd (“Faskally”).


In mid 2011 Faskally acquired land for the construction of a care home, although not intending itself to operate it. It was completed in November 2012 as the Huntly Care Home (“the Home”) and BCL then took informal occupation of it and began operating it as a care home, with a view to purchasing it from Faskally. In order to finance that purchase, BCL negotiated a sale and leaseback with Target Healthcare REIT Ltd (“Target”). It was achieved as described in the following paragraphs.


By disposition executed on 7 March 2013 (“the Grant”), Faskally...

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1 firm's commentaries
  • V@ Update - May 2021
    • United Kingdom
    • Mondaq UK
    • 31 May 2021
    ...- Supreme Court decides that sale and leaseback arrangement did not trigger VAT self-supply charge In Balhousie Holdings Ltd v HMRC [2021] UKSC 11, the taxpayer, Balhousie Holdings Ltd (Balhousie), had built a new care home and sold it to a subsidiary, Balhousie Care Ltd (Care). The sale wa......

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