HMRC confirm approach to "entire interest" disposal

HMRC have released Revenue and Customs Brief 13(2021) confirming their approach to the self-supply charge in VATA 1994 Schedule 10 para 36. HMRC accept that a person entering into a sale and leaseback will not have disposed of their "entire interest" in the relevant property, but continue to consider the sale and leaseback as two separate transactions.

Background

HMRC lost its case before the Supreme Court in Balhousie Holdings Ltd v HMRC [2021] UKSC 11 concerning the application of anti-avoidance legislation in VATA 1994 Schedule 10. When a property has been purchased or constructed at the zero rate of VAT, with a certificate stating that it will be used for a relevant residential or relevant charitable purpose, the property may be liable to a self-supply charge if there is a change in use or the entire interest is disposed of within a 10-year period.

In Balhousie, Balhousie bought a care home at the zero rate of VAT. To finance the acquisition and further developments, they entered into a sale and leaseback arrangement. As a result of that arrangement, Balhousie conveyed the land to Target, and Target simultaneously granted the land on a long lease back to Balhousie. The premises continued to operate as a care home without interruption. HMRC argued that Balhousie had disposed of their "entire interest" in the property, but the Supreme Court disagreed. The Supreme Court looked at the meaning of the disposal of the 'entire interest' in the property. The Supreme Court ruled that the sale and leaseback did not account for the disposal of its 'entire interest' in the property because the simultaneous sale and leaseback meant that Balhousie always had an interest in the property either as owner or lessee without interruption. This meant there was no break in the operation of the property as a care home throughout the transfer from the sale to the lease agreement. For a full review of this case, see our article VAT composite transactions and sale and leaseback.

Revised policy

The Revenue and Customs brief confirms that there will not be a disposal of an entire interest in a property when all the following conditions are in place:

• a qualifying property must have been purchased
• when the property is sold, there must be an immediate lease in place, which is a seamless transaction with no time lapse
• the lease must be for the remaining term of the 10 years from the original purchase date or longer
• the property must be continually used or operated for a qualifying purpose, meaning the business suffers no break in trade during the sale and leaseback.

If these conditions are not met then the sale of the property or the giving up of a long lease within the 10-year period will be subject to the self-supply charge for the remaining term, as the taxpayer will have disposed of their entire interest in the property within the 10 year period.

Comment

HMRC has essentially limited the scope of the Supreme Court decision to the facts of the Balhousie case. However, that case is potentially of wider interest due to the judgment of Lady Justice Arden.

Lady Arden considered that the jurisprudence of the ECJ indicated that EU principles of construction should be applied to the construction of the UK's domestic zero-rating provisions. This was important as "it is assumed that P can be said to have disposed of his entire interest in premises as required by paragraph 36(2) of Schedule 10 to VATA if, applying the principles of VAT law, that is the effect of the relevant transaction under which this disposal is said to have occurred. If that key assumption is correct, those principles included the principle, which I will call "the single supply principle", to be derived from Card Protection Plan Ltd".

Lady Arden then noted the decision of the ECJ in Mydibel v Belgium (Case C-201/18) [2019] STC 1342. In this case, which involved the adjustment of input VAT on construction costs where a building was subject to a sale and leaseback, the ECJ held that the transaction should, in essence, be combined based on the economic reality of the situation. There was no substantive difference between Mydibel and Balhousie according to Lady Arden, and accordingly there was no reason why it should not equally be possible to apply single supply analysis in this case to avoid the conclusion that the taxpayer had disposed of its entire interest in the property. For the Mydibel case, see our article "Sale and leaseback treated as a composite transaction for input VAT recovery purposes".

However, the Revenue and Customs Brief simply states that HMRC continue to view a sale and leaseback as two separate transactions, since the majority of the Supreme Court did not consider this point and decided the case on the meaning of the words "entire interest".