Nick Burrows and Ed Giles, in our Charities & Education team, explain the recent Supreme Court ruling that could be good news for some charities.
In Balhousie Holdings Limited v HMRC [2021], the Supreme Court has recently given a ruling which stands to potentially save charities millions of pounds in VAT when constructing or purchasing zero-rated buildings.
Background of the law
The Value Added Tax Act 1994, Section 30, stipulates that goods and services specified in Schedule 8 to the Act are zero-rated, meaning that VAT is not payable when it normally would be. This includes a premises being renovated or altered, which is solely for use as a ‘relevant residential purpose’ after the works have been carried out.
Balhousie Care run a group of residential care homes and acquired a new property which was zero-rated for VAT. The property’s zero-rated status was on the basis that Balhousie intended to use the building as a care home which met the requirement a ‘relevant residential purpose,’ and issued a certificate confirming there position.
What was the issue?
In this recent case, Balhousie Care issued a zero-rating certificate for the construction of a residential care home which saved it circa £800,000 in VAT on the £4 million value. As part of the financing of the construction, the company completed a sale and leaseback arrangement; a common means of financing such projects.
Typically, a VAT update will be required for buildings which are zero-rated for a relevant residential purpose or charitable purpose and subsequently disposed of within 10 years. The key term here being ‘disposed’ (i.e. sold).
In this instance, HMRC contested that the sale and leaseback was in fact a disposal, and so the VAT should be paid and adjusted to the amount of the 10-year period remaining.
The ruling
The ruling, which overturned an earlier decision that VAT should be paid in certain circumstances, concerns the application of clawback provisions that apply where the construction or purchase of a new building is made on a zero-rated basis, and the building is later sold within the first 10 years.
Lord Briggs set out as part of his ruling that “there was no time when [Balhousie Care] was neither the owner nor the lessee of the relevant premises. It had not therefore disposed of its entire interest in the care home.” As such the zero-rating certificate remained valid.
It has become clear from this case that in such instances where an operator wishes to make use of a sale and leaseback arrangement, it must pay careful attention to the timing of each component; being the sale, and the leaseback, to ensure that at no time the full interest in the property has been disposed of.
If you are concerned about how this recent ruling may affect you, your business, or your charity, please contact Nick Burrows and our Charities & Education team.
For further information or legal advice, please contact law@blandy.co.uk or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.
