VAT update: Sale and leaseback of residential buildings

 HMRC has recently issued Brief 13/2021 in response that aligned with the Supreme Court decision in Balhousie Holdings Ltd, which experts have analyzed in a two-part series. The experts that offer Outsourced Accounting Services India say that zero-rating mainly applies to constructing a new building for "relevant residential purpose" and for "relevant charitable purpose as recipient disposes of the building within ten years from completion, a self-supply charge is triggered.

The disposal occurred mainly in consideration of sale and leaseback arrangement in order to raise finance for the ongoing operation of the care home in the case of Balhousie as the fairness would insist that such an arrangement does not trigger the self-supply charge. However, the experts that offer Outsourcing Bookkeeping Services say that the Supreme Court disagreed.

What looks ahead with HRPC?

The HMRC Brief 13/2021 makes two points, one of which is contentious while the other seems helpful as per experts at Mindspace Outsourcing. HMRC mainly looks at a sale and leaseback as two separate transactions, and that adds that the Supreme Court did not revisit this point. On the flip side, the Supreme Court considered the ECJ decision where the European Court held that in the context of a sale and leaseback for funding purposes. Hence these otherwise separate transactions are appropriately treated as a single transaction, and the other point raised by the new VAT brief is more helpful. HMRC shall now allow that if they align with four conditions. It includes that the property must to be used for a relevant residential or charitable purpose and if to be used for a suitable residential or charitable purpose, which is apparent in the Balhousie decision. Furthermore, the subsequent lease must cover at least the remaining portion of not less than a 10-year period. Above all, the property must be used after the sale as original to get the qualification mark. 

However, there is no explicit reference to the motive for the sale and leaseback. Still, experts at Outsourcing Accounting and Bookkeeping expect most objectives to raise finances, and it may be that the sale and leaseback have some other motive at times. 

As per existing guidance, found in the VAT construction manual at VCONST21400, the HMRC brief essentially modifies which mainly explains that the critical test is the "occupational or physical use" of the property and where the property continues to be used for a qualifying purpose, a self-supply does not arise. It is clear that HMRC failed to apply this line in the Balhousie case. However, experts tend to understand this advice where it has generally been used in practice. This is because the decision mainly addresses whether the taxpayer aims to buy a property featuring  VAT applied at the zero-rate and self-supply legislation in Sch 10 of VAT Act 1994 is all about the situation where the taxpayer must have a building constructed at the zero-rate. 

Hence where the taxpayer has a building constructed for its qualifying activity, this guidance will apply as 13/2021 does refer to both circumstances.