HMRC confirms VAT policy on sale and leasebacks

Adam Cutler, Director, VAT and Customs Duty Services

HMRC has confirmed its policy on the VAT treatment of sale and leaseback transactions following Supreme Court decision in Balhousie earlier this year. This will be a welcome both by the care home operators directly affected; and by anyone contemplating such a transaction to raise finance for whom some uncertainty is now removed. However, in ignoring a judgement of the Court of Justice of the EU (CJEU) in favour of UK court decisions, it casts doubt on how much reliance can be placed on these going forward.

Sale and leaseback of care homes and other relevant buildings

The construction, or first sale by a developer, of buildings intended as care homes, student residences, community centres, and similar buildings is zero-rated if the operator certifies that they will use the building in one of these relevant ways. However, if the operator disposes of their entire interest in the building in the first ten years, there is a requirement to self-charge VAT on a proportion of the amount originally zero-rated. This is the case even if the new owner intends to use the building for the same purpose.

Balhousie sold and immediately leased back its new care home. HMRC considered it had disposed of its entire interest and therefore VAT was due. The company appealed and eventually won its case in the Supreme Court. For further details on this case read our insight.

On 6 October 2021 HMRC published Revenue & Customs Brief 13/21, confirming that in similar circumstances they accept that there has not been a disposal of the operator’s entire interest and no VAT is due. The leaseback must be immediate, with no break in trade, and the qualifying purpose must continue.

Sale and leasebacks generally

HMRC also confirm that they consider a sale and leaseback to be two transactions for VAT. HMRC note that this was accepted by the Upper Tribunal and the Court of Session, and was not revisited in the Supreme Court.

The uncertainty arose due to the decision of the CJEU in Mydibel, which held that a lease and leaseback transaction undertaken for financing purposes should be ignored. One of the five justices of the Supreme Court had based her decision that there was no VAT due on this judgement.

What does this mean for future sale and leasebacks?

HMRC’s clarification of its policy provides welcome certainty for those contemplating a sale and leaseback of their property.

However, it means that VAT needs to be considered carefully by those contemplating a sale and leaseback. Failure to do so can lead to VAT recovered on capital expenditure up to ten years previously becoming repayable to HMRC.

It is unfortunate that HMRC’s brief only talks about sale and leaseback arrangements, leaving some uncertainty as to whether they take the same view of a lease and leaseback, particularly given the CJEU decision in Mydibel concerned the latter situation.

Can we still rely on CJEU decisions?

CJEU decisions released before Brexit were meant to be followed by the UK courts after the UK had left the EU, and given the same status as decisions of the Supreme Court. It is interesting that HMRC are preferring an approach which had only been approved at appeal court level (which was before the CJEU had issued its decision in Mydibel), albeit that four of the five justices of the Supreme Court did not re-open this issue.