Revenue and Customs Commissioners v Balhousie Holdings Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 20 October 2017 |
| Neutral Citation | [2017] UKUT 410 (TCC) |
| Date | 20 October 2017 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2017] UKUT 410 (TCC)
The Honourable Lady Wolffe
Upper Tribunal (Tax and Chancery Chamber)
Value added tax – Interpretation of VATA 1994, Sch. 10, para. 36(2).
The Upper Tribunal (UT) ruled that in selling and leasing back a care home the taxpayer disposed of its entire interest in the property and triggered a self-supply Value added tax (VAT) charge.
HMRC appealed a decision of the First-tier Tribunal (FTT) rejecting its ruling that Balhousie Holdings Ltd (Balhousie) was liable to a VAT self-supply charge arising from the disposition of the Huntly residential care home to Target Healthcare REIT (Target).
Balhousie operates 25 care homes and is registered for VAT as part of a group registration with Balhousie Care (BC) and three other companies. The issue in this appeal was whether Balhousie was liable to a self-supply charge as a consequence of BC's sale of the Huntly care home to Target and its immediate lease back to BC. The property had previously been supplied to BC at the zero rate of VAT as the first grant of a major interest in a relevant residential property.
The case centred on the interpretation of VATA 1994, Sch. 10, para. 36(2) which applies where there is a disposal or change of use following a relevant zero-rated supply. The issue was whether BC had “disposed of its entire interest” in the Huntly residential care home within the meaning of that provision, in which case the self-supply charge would be triggered. Balhousie contended that BC did not dispose of its “entire interest” because the arrangements with the third party were a sale and lease back. HMRC argued that the proper focus was on the individual transactions, particularly the disposal. On that approach, BC disposed of its entire interest in the property on sale, notwithstanding the existence of an agreement immediately thereafter to lease the care home back to BC for continuation of its use for a relevant residential purpose.
The FTT had previously rejected HMRC's contentions, finding that although BC had disposed of its entire interest in the care home for a scintilla temporis (a brief moment in time), the sale and lease back was not a disposal of BC's entire interest for the purpose of para. 36(2) and Balhousie was not, therefore, liable to a VAT self-supply charge arising from the disposition of the care home to Target.
Before the UT, HMRC contended that the FTT had erred in law in its interpretation of para. 36(2) and ought to have concluded that the reference to an “entire interest” in para. 36(2) was to the particular interest in land which was the subject of the initial zero-rated supply and that a sale of land was the transfer of a party's entire interest in land irrespective of whether a separate interest in that land was obtained as the result of a connected transaction. Therefore, according to HMRC, BC disposed of its entire interest in the Huntly care home when it sold the same to Target and the disposal by BC gave rise to a charge to VAT. Balhousie, stressed the composite character of the overall arrangements by which BC disposed of, and leased back, the Huntly care home. It emphasised that the individual transactions (of the disposal and the lease) were governed by the missives between BC and Target.
The UT considered that the starting point in its analysis was a consideration of the original supply of the care home by a third party to BC which attracted zero-rating. The fundamental question was whether the subsequent arrangements entered into by BC did or did not fall within para. 36(2). The difference in approach between the parties was whether those arrangements were viewed as a composite transaction. If they were, as claimed by Balhousie, then the net result would be that BC regained a relevant interest in the care home under the lease, in which case it was not necessary to be concerned with any intermediate steps. The alternative, as argued by HMRC, would be that each individual transaction within the arrangements, including the disposition, was subject to a distinct VAT analysis.
Balhousie's argument centred on the proposition that the right BC had as a result of the composite arrangements, that is a right of occupation under the lease, was the same as one of the rights it enjoyed before those arrangements, namely being in occupation as an incidence of ownership. Consequently, there had been no disposal of BC's entire interest in the care home. In the judgment of the UT, the fallacy in this approach was to conflate the similarity of those rights, but to disregard their source. The crucial difference was that, as a result of the arrangements, BC's right of occupation was derived from the lease. BC no longer derived the right of occupation from the supply that had constituted the relevant supply. If one compared the rights BC held both before and as a consequence of the composite arrangements it no longer enjoyed any rights flowing from the original or relevant zero-rated supply. Its right of occupation flowed only from the subsequent lease. Accordingly, by the disposition of the Huntly care home to Target, BC disposed of its entire interest in the property. In the judgment of the UT, the FTT had erred in law in the manner in which it identified the purpose of the statute. Balhousie was liable to a VAT self-supply charge arising from the disposition of the Huntly residential care home. HMRC's appeal was duly allowed.
The UT's decision highlights a potentially expensive pitfall in respect of the disposal of an interest in, or a change of use of, a property following a relevant zero-rated supply. The decision emphasises the transactional nature of VAT and the fact that every supply has its own consequence and must be viewed in isolation.
Elisabeth Roxburgh, Office of the Advocate General, appeared for the appellant
Philip Simpson QC, Grant Thornton, appeared for the respondent
[1] This is an appeal by the Commissioners for Her Majesty's Revenue and Customs (“HMRC”) against a decision of the First-tier Tribunal, sitting in Edinburgh, released on 31 May 2016, [2016] TC 05131 (the “Tribunal Decision”), in which Judge Gemmell and Judge Shearer allowed an appeal by the Appellant Balhousie Holdings Limited (“Balhousie”) in respect of:
- a decision of HMRC, by letter dated 24 June 2014, that Balhousie was liable to a VAT self-supply charge arising from the disposition of the Huntly residential care home (the Huntly care home) to Target Healthcare REIT (Target) in March 2013 (the Review Decision); and
- a decision of HMRC, by letter dated 9 February 2015, to issue a notice of penalty assessment to Balhousie in respect of the Review Decision (the Penalty Decision).
Balhousie is the respondent to this appeal; it was the appellant before the First-tier Tribunal. HMRC is the appellant in these proceedings before the Upper Tribunal. It was the respondent in Balhousie's appeal to the First-tier Tribunal. For ease of reference, I shall refer to them by name, “Balhousie” and “HMRC”.
[2] While the First-tier Tribunal refused to grant HMRC permission to appeal to the Upper Tribunal (“the UT”), by a decision released on 26 September 2016, the UT allowed HMRC's application for permission to appeal, made under rule 21 of the Tribunal Procedure (Upper Tribunal) Rules 2008.
[3] Balhousie operates 25 care homes. It also operates a VAT group with Balhousie Care (“BC”) and three other subsidiaries. The issue in this appeal is whether Balhousie was liable to account for VAT on a self-supply that arose as a consequence of BC's sale of the Huntly care home, which had been zero-rated when supplied to BC, to a third party (Target) in March 2013, and the immediate lease back of the Huntly care home from Target to BC. The answer to this issue turns on the interpretation of paragraph 36(2) of Schedule 10 to the Value Added Tax Act 1994 (“the Act”) and the determination of whether or not, by virtue of those arrangements, BC had “disposed of its entire interest” in the Huntly residential care home, within the meaning of that provision.
[4] Balhousie argues that BC did not dispose of its “entire interest” in the Huntly care home because the arrangements with the third party were a sale and lease back, and that one had to look at the substance of those arrangements as a whole, and which had been governed by missives between the parties. HMRC argues that the proper focus is on the individual transactions, particularly the disposal. On that approach, BC disposed of its entire interest in the property on sale, notwithstanding the existence of an agreement immediately thereafter to lease the Huntly care home back to BC.
[5] The First-tier Tribunal considered that the sale and lease back transaction was a composite transaction forming a commercial unity. The First-tier Tribunal held that, although BC had disposed of its entire interest in the care home for a scintilla temporis, the sale and lease back was not a disposal of BC's entire interest in the Huntly care home for the purpose of paragraph 36(2) of Schedule 10 to the Act. Accordingly, the First-tier Tribunal allowed Balhousie's appeal. The UT granted HMRC's application for permission to appeal on the basis that “the question of whether a sale and leaseback should be regarded as involving a disposal of the seller/lessee's entire interest in the property for the purposes of paragraph 36(2) of Schedule 10” was arguable.
[6] It may assist to summarise the relevant statutory provisions before setting out their terms. Item 1 of Group 5 of Schedule 8 of the Act applies zero-rating (which may be beneficial to the tax payer) to the first grant by a person constructing a building...
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