VAT on the sale and leaseback of care homes

Rob Geary
VAT, Healthcare
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The Supreme Court’s recent decision in Balhousie Holdings [Balhousie Holdings Ltd v HMRC [2021] UKSC 11] indicates that care home operators (and other entities such as charities and universities) may be able to use sell and lease back arrangements to finance the construction of new buildings without incurring a significant VAT penalty.

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Owners and users of buildings used for a relevant charitable purpose (RCP) or relevant residential purpose (RRP, such as care homes) are often entitled to acquire these without VAT being charged on the purchase price. This is a helpful benefit for these entities, as often they make exempt supplies and are therefore unable to recover VAT incurred on the costs of making these supplies.

However, those who have claimed this relief have to consider the use of the building for the 10 years from the purchase date of the property. If the use of the building changes within this ten year period, then HMRC can force businesses to pay a self-supply charge to adjust for the period of changed usage, which can retrospectively reduce or completely get rid of the VAT saving on the purchase.

In this case, Balhousie Care, which operates care homes in Scotland, acquired a building without paying VAT by issuing a certificate confirming its intention to use the property for a ‘relevant residential purpose’, i.e., a care home. As part of the process of raising funding for this purchase, it entered into a sale and leaseback arrangement with an investment trust. Balhousie sold a number of care homes to the trust and the trust simultaneously granted 30-year leases back to Balhousie for running the care homes day to day, with Balhousie continuing to use all three properties as care homes.

HMRC challenged this treatment, as they believed that Balhousie had disposed of their interest in the care homes during this 10 year adjustment period, and therefore a self-supply charge was due for the change in use. HMRC decided that Balhousie had disposed of its entire interest in the new building at the sale stage, before the leaseback was granted, and assessed Balhousie for VAT of £800,000 plus £24,000 interest, a very significant sum given the overall activity of the business. Balhousie appealed this, believing that a sale and simultaneous leaseback could not be deemed to be a full disposal of an asset.

After many years of court activity and appeals, on 31 March 2021 the Supreme Court ruled in favour of Balhousie, on the grounds that they had not disposed of their entire interest in the property.

While they had disposed of their freehold interest, they maintained a leasehold interest and therefore had continued to use the property for a RRP. Because of this, no self-supply charge was due and HMRC withdrew their assessment.

The significance of this case is that it has been decided by the Supreme Court. Therefore, it is binding and now settled case law that can be relied on by other businesses looking to engage in this kind of arrangement. While some caution should still be taken, as HMRC have not outlined any new guidance or business briefs yet on this topic, and each new arrangement should be compared to the Balhousie case, it is an encouraging sign for those who rely on this essential form of fund raising for growing and maintaining their businesses.

If you have any questions or queries regarding the above

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