Policy paper

Revenue and Customs Brief 13 (2021): Change in the VAT treatment of the construction self-supply charge

Published 6 October 2021

Purpose of this brief

This brief confirms that, following the Supreme Court decision of 31 March 2021 in the case of Balhousie Holdings Limited 2021 UKSC 11, HMRC have revised the meaning of ‘entire interest’ for the purposes of the self-supply charge.

Who needs to read this

You should read this brief if you’re:

• an organisations within the care home, NHS or charities sector
• business is engaged in property transactions which are carried out for a relevant residential or relevant charitable purpose

Background

In March 2013, Balhousie Care Ltd bought a care home at the zero rate of VAT. To finance the acquisition and further developments, they entered into a sale and leaseback arrangement with Target Healthcare REIT. As a result of that arrangement, Balhousie Care conveyed the land to Target, and Target simultaneously granted the land on a long lease back to Balhousie. The premises continued to operate as a care home without interruption.

When a property has been purchased or constructed at the zero rate of VAT, with a certificate stating that it will be used for a relevant residential or relevant charitable purpose, the property may be liable to a self-supply charge if there is a change in use or the entire interest is disposed of within a 10-year period. The self-supply charge is calculated from the date when the change of use occurs or when the entire interest is disposed of. VAT then becomes due on the remaining months within the 10-year period.

In the case of Balhousie, the Supreme Court looked at the meaning of the disposal of the ‘entire interest’ in the property. Balhousie had a sale and leaseback arrangement where Balhousie continued to operate the premises for a relevant residential purpose throughout the transaction.

Supreme Court decision

The Supreme Court ruled that in the case of Balhousie, the sale and leaseback did not account for the disposal of its ‘entire interest’ in the property because the simultaneous sale and leaseback meant that Balhousie Holdings Limited always had an interest in the property either as owner or lessee without interruption. This meant there was no break in the operation of the property as a care home throughout the transfer from the sale to the lease agreement.

HMRC view a sale and leaseback as 2 separate transactions and this was accepted by both the Upper Tier tribunal and Court of Session. The Supreme Court did not revisit this point and stated that the issue to address in Balhousie was whether or not there had been a disposal of an entire interest.

HMRC policy in relation to the self-supply charge

The disposal of your entire interest in a property will not occur when all the following conditions are in place:

• a qualifying property must have been purchased
• when the property is sold, there must be an immediate lease in place, which is a seamless transaction with no time lapse
• the lease must be for the remaining term of the 10 years from the original purchase date or longer
• the property must be continually used or operated for a qualifying purpose, meaning the business suffers 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 a long lease within the 10-year period will be subject to the self-supply charge for the remaining term, as you will have disposed of your entire interest in the property within the 10 year period.

More information

Further information on the construction self-supply charge can be found in Buildings and construction (VAT Notice 708).

For information on how to make adjustments see How to correct VAT errors and make adjustments or claims (VAT Notice 700/45). Be aware of the 4-year cap, and the rules of unjust enrichment.