Balhousie Holdings Ltd v Commissioners for Her Majesty’s Revenue and Customs

Paragraph 36(2) of Schedule 10 to the Value Added Tax Act 1994 triggers a VAT self-supply charge only if there is a time during the relevant ten-year period when the recipient of zero-rated supplies has no interest in the premises. “Entire interest” means every interest, including a lease, subject to a possible de minimis exception.

The provision requires an assessment of the resulting state of affairs, rather than the VAT treatment of each transaction in isolation. The aggregate effect of simultaneous or successive acquisitions and disposals must therefore be considered. A simultaneous sale and leaseback does not trigger the charge where the seller retains a substantial leasehold interest without any intervening gap.

Balhousie Care Ltd acquired a newly constructed Scottish care home through a zero-rated first grant. To finance the acquisition, it simultaneously sold the home to a finance house and took a 30-year leaseback. The care-home use continued throughout.

The First-tier Tribunal held that there was no moment when the company lacked either an ownership or leasehold interest. The Upper Tribunal and the Inner House of the Court of Session, [2019] CSIH 7, held that the sale nevertheless disposed of the entirety of the ownership interest previously acquired.

The central issue was whether the simultaneous sale and leaseback amounted to disposal of the company’s “entire interest” under paragraph 36(2) of Schedule 10 to the Value Added Tax Act 1994, thereby triggering a self-supply charge exceeding £800,000.

1. Appeal allowed. Lord Briggs, with whom Lord Hodge, Lord Sales and Lord Carloway agreed, held that the sale and leaseback did not dispose of Balhousie Care Ltd’s entire interest in the care home. Paragraph 36(2) of Schedule 10 to the Value Added Tax Act 1994 was therefore not engaged.

2. “Entire interest” means exactly what it says. Subject to a possible de minimis exception, which did not arise for decision, the charge is triggered only when the recipient of the zero-rated supplies no longer has any interest in the premises. The provision is not confined to disposal of the particular ownership or leasehold interest acquired through an earlier zero-rated first grant. Part 2 of Schedule 10 applies to a broader class of zero-rated supplies, including construction services and building materials.

3. Paragraph 36(2) asks whether a state of affairs has arisen in which the recipient has disposed of every interest. It does not ask whether one transaction, viewed separately, constituted such a disposal. All simultaneous or successive acquisitions and disposals must be examined for their aggregate effect. This approach accords with the general principle that taxing provisions are construed purposively and applied to transactions viewed realistically.

4. The sale and the 30-year leaseback took effect simultaneously. One transaction disposed of the ownership interest while the other conferred a substantial leasehold interest. There was no realistic scintilla temporis during which Balhousie Care Ltd had no interest. The parties’ purposes and the question whether the transactions were contractually interdependent were immaterial.

5. The majority rejected HMRC’s contention that paragraph 36(2) was designed to preserve the recipient’s control over the building’s use or to assist monitoring. Its discernible purpose was to require a recipient of zero-rated supplies to remain economically committed to the qualifying project for up to ten years. The tapered charge ends when that commitment has been demonstrated for the whole period.

6. Lady Arden agreed that the appeal should be allowed, but by a different route. She considered that EU VAT principles governed zero-rating and that, following Mydibel, a sale and leaseback undertaken for financing purposes should be treated as a single transaction. Its composite effect involved no disposal of the company’s entire interest.

1. United Kingdom Supreme Court: Allowed the appeal and restored the conclusion that paragraph 36(2) had not been triggered: [2021] UKSC 11.
2. Inner House of the Court of Session: Upheld HMRC’s case that the sale disposed of the company’s entire interest notwithstanding the leaseback: [2019] CSIH 7.
3. Upper Tribunal: Allowed HMRC’s appeal and held that the sale constituted disposal of the entire interest acquired under the zero-rated grant.
4. First-tier Tribunal: Held that no self-supply charge arose because there was no time when the company was neither owner nor lessee.