Supreme Court rules sale and leaseback of Aberdeenshire care home did not trigger VAT exemption claw-back

The appellant, Balhousie Holdings Ltd, acquired the care home in Huntly in 2013. It was originally determined by Her Majesty’s Revenue and Customs that this caused it to lose the benefit of zero-rating under certain parts of Schedule 10 to the Value Added Tax Act 1994, an approach upheld by the Inner House of the Court of Session.

The appeal was heard by the Deputy President of the Supreme Court, Lord Hodge, along with Lord Briggs, Lady Arden, Lord Sales, and Lord Carloway. The appellant was represented by Philip Simpson QC and Roger Thomas QC, and the respondent by Kieron Beal QC and advocate Ross Anderson.

Scintilla temporis

The 1994 Act 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, including care homes. However, paragraph 36(2) of Schedule 10 to the 1994 Act also provides for a “claw-back” of this benefit in the form of a self supply charge to VAT should the recipient of the supplies dispose of their entire interest in the building within 10 years of its completion. 

In March 2013, Balhousie Care Ltd, a company within the appellant’s VAT group, acquired a recently constructed care home from a developer also within the Balhousie group, but not the VAT group. It financed the acquisition by means of a sale and leaseback agreement with a finance house, Target Healthcare REIT Ltd, with the date of entry and the beginning of the lease fixed as the same date. HMRC considered this to be a trigger for the self supply charge, which if payable would amount to over £800,000. 

BCL appealed HMRC’s decision to the First-tier Tribunal, which rejected HMRC’s argument that the sale and leaseback created a scintilla temporis, i.e. a moment between the sale of BCL’s ownership interest and the beginning of the lease where it had no interest in the property, that triggered the self supply charge. 

HMRC appealed the decision of the First-tier Tribunal to the Upper Tribunal, which found in its favour based on an argument that the sale, regardless of the leaseback, was a disposal of BCL’s interest because when viewed separately it was a disposal of the exact interest acquired by the zero-rated first grant from the developer. The Upper Tribunal’s decision was upheld by the Inner House on appeal by BCL, who then appealed further to the Supreme Court. 

Purely notional pseudo-transaction 

The main judgment, with which Lords Hodge, Sales, and Carloway agreed, was delivered by Lord Briggs. Describing HMRC’s arguments as having “surprising consequences”, he first gave an illustrative example, explaining: “P, the owner of a disused mill […], 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?” 

He continued: “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.” 

Considering the text of the 1994 Act in detail, he went on to say: “The bar is set very low, by setting the trigger for claw-back at the point when P has disposed of P’s entire interest, rather than some lesser proportion of it. Subject possibly to a de minimis exception, which has not been argued and does not arise for decision, ‘entire’ means exactly what it says, namely that P no longer has any interest in the premises.” 

On whether the two transactions could not be treated as a single transaction under the VAT principles of fiscal neutrality and objectivity, Lord Briggs said: “[Paragraph 36(2)] demands an enquiry about the existence or otherwise of a state of affairs, namely whether a time came when P (here BCL) no longer had any interest in the relevant premises (here the Home) because it had by then disposed of its entire interest therein. The use of non-technical language and the past tense supports this interpretation.” 

He continued: “The existence of such a state of affairs then brings into existence a purely notional additional pseudo-transaction, namely a self-supply, not as part of any chain of real transactions but as a peg upon which to hang, and quantify, the claw-back of a tax benefit.” 

Lord Briggs concluded: “[The] construction contended for by HMRC simply fails to make sense of sub-paragraph (2), whatever rational purpose may be assigned to it, as is illustrated by the two examples at the beginning of this judgment. Why should a self-supply charge be triggered where P, after the receipt of an earlier lease as a zero-rated first grant, later acquires full ownership and then disposes only of a lease? And how on HMRC’s case does paragraph 36(2) work at all when other zero-rated supplies are received by P without ever receiving a zero-rated first grant?” 

For these reasons, the appeal was allowed. In a separate judgment, Lady Arden considered that principles of EU VAT law were correctly applied by the Inner House in its decision, but otherwise concurred with Lord Briggs that the sale and leaseback should be considered together.