HMRC changes policy on construction self-supply charge
Jan Garioch CA discusses Revenue & Customs Brief 13 (2021) which responds to the Supreme Court decision on Balhousie Holdings Ltd 2021UKSC 11.
HMRC policy change following Supreme Court decision
Revenue & Customs Brief 13(2021) was published in October 2021 to set out HMRC’s change of policy on construction self-supply charge following the case of Balhousie Holdings Ltd 2021 IKSC11 (Balhousie). HMRC lost before the Supreme Court and have had to revise their interpretation of the self-supply charge.
Background of the Balhousie case
To recap, the Balhousie case considers the clawback of zero rating granted for the construction or conversion of buildings intended for relevant residential or charitable use. Balhousie began operating a newly constructed property as a care home with a view to purchasing it from the developer. On 7 March 2013 the home was conveyed to Balhousie, and in order to finance the purchase, Balhousie had negotiated a sale and leaseback with a third party. Therefore, also on 7 March 2013, Balhousie sold on to the third party under missives which required the home to be leased back to Balhousie for a period of 30 years. The lease was attached to the missives and Balhousie signed as lessee, again on the same day. HMRC attempted to claw back the zero rating, arguing that a self-supply was triggered.
Progress through the Courts
The law states that self-supply is triggered if, within ten years from the completion of the building, either the beneficiary of the zero-rating disposes of its ‘entire interest’ in the property or there is a change of use to a non-qualifying purpose. HMRC argued before the First Tier Tribunal that the self-supply charge was triggered because there was a momentary gap when Balhousie had sold its ownership interest but had yet to receive its leasehold interest. That FTT did not accept that there was a time within the relevant ten-year period when Balhousie was neither the owner nor the lessee of the care home.
HMRC appealed that decision, and was successful in both the Upper Tribunal and Court of Session with a different argument that the sale and leaseback should be viewed as two separate transactions. In other words, regardless of the leaseback, the sale was none the less a disposal of exactly the interest it was originally granted by the developer and thus triggered the self-supply charge.
The Supreme Court’s deliberations
When the case ultimately came before the Supreme Court, it identified the crux of the dispute as a ‘point of construction about the non-technical wording of an apparently simple provision in a taxing statute’. It was unimpressed by HMRC’s argument that ‘entire interest’ means only the interest which Balhousie acquired by the zero-rated grant from the developer. It was unpersuaded by HMRC’s contention that a self-supply charge is triggered on disposal of that interest even if Balhousie retains or simultaneously acquires another interest, even a major one, which falls short of ownership.
The Supreme Court complained that surprising consequences would arise from accepting HMRC’s argument. It gave the illustration of someone initially acquiring a zero rated first grant of a 21-year lease, prior to acquiring additional rights the year after to become the outright owner of a care home. If five years down the line that person grants an identical 21-year lease to another care home operator whilst retaining its ownership in the property, then under HMRC’s analysis a self-supply charge would be triggered.
The Supreme Court found that this failed to make sense because it ignores the continued right of ownership, and also ignores the fact that from year two to year six the original lease had merged with the property right and been extinguished. Balhousie’s appeal was allowed, and the self-supply charge was not triggered.
HMRC’s revised policy
Reacting to the Supreme Court judgement, HMRC published Brief 13 ‘Change to the VAT treatment of the construction self-supply charge’ in October 2021. HMRC now accept that the disposal of an ‘entire interest’ in a property does not occur when all of the following conditions are in place:
- a qualifying property has been purchased.
- when the property is sold there must be an immediate lease in place as a seamless transaction with no time lapse.
- the lease must be for the remaining term of the ten years from original purchase, or longer.
- the property must be continually used or operated for a qualifying purpose so that there is no break in trade during the sale and leaseback.
If these conditions are not met, then the sale of the property or the giving up of the long lease within the ten-year period will be subject to the self-supply charge for the remaining term.