The recent VAT case of Balhousie Holdings Ltd, which entered into a sale and leaseback arrangement for one of its care homes, has seen the taxpayer successfully appeal against an £800,000 VAT bill caused by an obscure piece of legislation. To make matters worse, HMRC tried also to apply a penalty of £144,000.
Paragraph 36 to Schedule 10 of the VAT Act 1994 was given effect by the VAT (Buildings and Land) Order 2011, after only a four week consultation period which included Christmas and the New Year. Part of it provides that if a business (in this case, a care home) has previously benefitted from zero rating through the issue by it of a certificate of relevant use to the supplier, and changes use within a ten year period, then a proportion (based on the remaining years) of the VAT originally saved is repayable as a self-supply charge. This sum is based on either the cost of the new construction of the home or the value of the grant made to it (in this case, the freehold), and is likely to be a significant amount (or as the accountants advising Balhousie stated – “business ending”).
This principle itself is not unreasonable, as it is intended to ensure that the building is put to a relevant purpose for a ten year period, but what is unreasonable was the introduction of an additional clause that meant if the care home operator disposed of its whole interest in the property, then it was deemed an automatic change of use on the basis that it no longer had control over future use.
HMRC argued that the sale and leaseback were two separate and distinct transactions and each had to be considered independently, meaning that Balhousie had disposed of its entire interest, albeit for only an instant, prior to the new lease being granted back to it. The Tribunal decided however that these two transactions should be considered as one commercial purpose (one of financing) and therefore, Balhousie had retained an interest in the property by virtue of the lease granted back to it. The Tribunal was also sympathetic to the taxpayer’s argument that the purpose of the law was intended to catch instances of tax avoidance, and not normal commercial scenarios such as a sale and leaseback.
At Moore Stephens we have previously made representations to Her Majesty’s Government about the damaging impact of this legislation on the care homes sector, which hinders potential exit or re-financing plans, or at worst catches out unsuspecting operators. In addition to the above, we believe that the law should be further relaxed to mean that if a care home is disposed of as a transfer of a going concern, then as part of that transfer, the conditions of the certificate issued are also passed to the purchaser, who therefore assumes the responsibility for future use.
It is not yet known whether or not HMRC will appeal – in the circumstances, we would hope not – but in the meantime any care home operators who have already been caught by this provision or who are thinking of disposing of their interest, having previously issued a certificate of relevant use, should seek professional advice.
If you would like to discuss the implications of this case further, then please contact VAT Partner Nick Warner.