Care homes and other homes, charities and other not-for-profit organisations (NFP) will all be delighted by a recent Supreme Court decision in their favour (published 31 March 2021). When purchasing or constructing a new building, these operators now have a way to utilise sale and leaseback free of the VAT threat imposed by HMRC.
A cash flow saving can be achieved by selling or leasing a building to a third party who immediately leases the building back to the relevant operator. The third party removes the need for the operator to find the funds to pay for the building by accepting payments as a lease over a period of time.
While this is helpful in driving down the operator’s loan requirement, there was a VAT issue so expensive as to make the arrangement ineffective.
HMRC claimed that operators such as the Balhousie Care group, who were in the care home business, triggered a clawback of VAT when they sold the new building to the third party.
The construction or first grant of a new building to the operator is zero-rated for VAT if the purchaser (the operator) has certified that the property will to be used for a relevant purpose. A relevant purpose covers various charitable uses and residences for ‘clearly defined social reasons’. If, within ten years of acquiring the building, the operator either sells it or changes its use for purposes no longer defined as relevant residential or charitable, HMRC will claw back the benefit of the zero-rating for whatever remains of the ten year period.
In this case, Balhousie Care, having bought the building from the developer, immediately entered into a sale and leaseback arrangement with Target Healthcare REIT under which it committed to a 30-year lease. When Balhousie sold the building to Target, HMRC concluded that it had surrendered its ‘entire interest’ in the property and was liable to pay VAT amounting to hundreds of thousands of pounds.
In 2016 the First-tier Tribunal agreed with HMRC, considering that the sale of the building and the lease were two separate actions. This decision was upheld by the Court of Appeal. However, the Supreme Court disagreed on 31 March 2021, ruling that in this case Balhousie had not made a sale under the VAT legislation regarding relevant purpose. It was important that the possession of the care home by its new owner, Target, was subject to Balhousie’s rights under the lease which strengthened Balhousie’s contention that they had not ceded their ‘entire interest’ as part of the transaction.
This ruling is definitive, as HMRC has no further route for appeal.
It will be received with relief by charities, homes and other operators that use buildings for a relevant residential or charitable purpose. Charities are defined widely in VAT guidance to include most not-for-profit organisations; a qualifying residential purpose encompasses a spread of businesses including social care providers, children’s homes, nursing hostels, educational establishments and so on.
Sale and leasebacks are a common method of raising additional monies in these sectors, but the Balhousie case has long been a concern for those already locked into such arrangements and a deterrent for those who could have used them. If the Supreme Court had found in favour of HMRC, Balhousie would have been facing a large retrospective VAT bill. This is therefore a welcome decision and reviews should now be undertaken by operators and their advisers to adjust current arrangements for effectiveness or to implement opportunities which are now valid in law.