VAT – Zero rating – Sale and leaseback transaction – Respondent operating care homes – Property sold to third party as part of sale and leaseback transaction – Appellant commissioners considering respondent liable for VAT on self-supply – First-tier tribunal allowing respondent’s appeal – Appellants appealing – Whether sale and lease back disposal of entire interest in property within para 36(2) of Schedule 10 to Value Added Tax Act 1994 – Appeal allowed
The respondent operated 25 care homes in Scotland. It also operated a VAT group with BC and three other subsidiaries. An issue arose whether the respondent was liable to account for VAT on a self-supply as a consequence of BC’s sale of the one of the care homes, which had been zero-rated when supplied to BC, to a third party (T) and the immediate lease back of the care home from T to BC. The answer turned on the interpretation of para 36(2) of Schedule 10 to the Value Added Tax Act 1994 and the determination of whether or not, by virtue of those arrangements, BC had “disposed of its entire interest” in the residential care home, within the meaning of that provision.
The respondent argued that BC did not dispose of its “entire interest” in the care home because the arrangements with the third party were a sale and lease back, and that one had to look at the substance of those arrangements as a whole. The appellant commissioners argued that the proper focus was on the individual transactions, particularly the disposal. On that approach, BC had disposed of its entire interest in the property on sale, notwithstanding the existence of an agreement immediately thereafter to lease the property back to BC.
The First-tier Tribunal (FTT) considered that the sale and lease back transaction was a composite transaction forming a commercial unity. It held that, although BC had disposed of its entire interest in the care home for a moment in time, the sale and lease back was not a disposal of BC’s entire interest in the care home for the purpose of paragraph 36(2) of Schedule 10 to the Act. Accordingly, the FTT allowed the respondent’s appeal: [2016] UKFTT 377 (TC).
The Upper Tribunal granted the appellants’ application for permission to appeal on the basis that “the question of whether a sale and leaseback should be regarded as involving a disposal of the seller/lessee’s entire interest in the property for the purposes of para 36(2) of Schedule 10” was arguable.
Held: The appeal was allowed.
(1) VAT legislation required the court to focus on a specific transaction and other transactions were unlikely to have any bearing. It was not permissible to take a global view of a series of transactions in the chain of supply. In any event, the conventional transactional approach applied to VAT should not be subsumed into an approach that gave primacy to the “commercial reality” or the “overall effect” of a transaction, if the relevant taxing statute did not enjoin that approach. VAT was a transaction tax which required the component parts of a chain of transactions to be looked at individually and objectively, transaction by transaction. The courts were not to depart from that approach by giving primacy to the commercial reality or the overall effect of a transaction if the relevant taxing statute did not enjoin them to do so. It was clear from the FTT’s decision that it was deflected from the correct approach. That error led the FTT to treat the overall arrangements as the relevant transaction: Robert Gordon’s College v Customs and Excise Commissioners [1996] 1 WLR 291, Customs and Excise Commissioners v Southern Primary Housing Association Ltd [2003] EWCA Civ 1662 and UBS AG v Revenue and Customs Commissioners [2016] UKSC 13 followed.
(2) A supply comprising the construction and first supply of certain types of buildings (e.g. for residential use) was generally an exempt supply (see item 1 of Group 5 of Schedule 8 to the 1994 Act). Part 1 of Schedule 10, which was headed up “Buildings and Land”, made provision for the option to tax certain supplies of that character which would otherwise be exempt. Part 2 of Schedule 10, headed up “Residential and Charitable Buildings: Change of Use etc.”, included paragraphs 35 to 37. Paragraph 36 fell to be considered as part of that small cluster of provisions. Part 2 comprised a short anti-avoidance code. Its scope was defined in para 35, the charge to tax was set out in para 37, and the circumstances giving rise to the charge were identified in para 36(2) and para 36(3). Those sub-paragraphs were mutually exclusive: para 36(3) was concerned with changes of use, while para 36(2) was concerned with a disposal of the taxpayer’s entire interest in the premises, whether or not there was a change of use. The concept of “disposal” was intended to cover all transfers of the relevant interest.
(3) Whether the taxpayer had disposed of its entire interest involved examining the character of the interest said to have been disposed of. Therefore, the starting point was a consideration of the original supply which attracted zero-rating as a consequence of the option to tax. Before the Upper Tribunal, the appellants had focused on the argument that VAT was a transactional tax under which it was generally not possible to conflate related elements. In addition, they contended that the reference in the legislation to “entire interest” referred back to the original interest acquired by BC under the original zero-rated supply. It was the disposal of the freehold that was the relevant trigger for the para 37 charge and the fact that BC received back a leasehold interest did not negate that charge. That approach was more consistent with VAT as a transactional tax on individual supplies and the interpretation of the legislation as referring back to the original zero-rated interest. It made no difference that BC continued to have rights of occupation as they now flowed from a separate leasehold interest and not from the original zero-rated interest it received. Therefore, by disposing of the home to the third party, BC disposed of its entire interest for the purposes of para 36(2).
Elisabeth Roxburgh (instructed by the Office of the Advocate General) appeared for the appellants; Philip Simpson QC (instructed by Grant Thornton) appeared for the respondent.
Eileen O’Grady, barrister
Click here to read transcript: Commissioners of HM Revenue and Customs v Balhousie Holdings Ltd
