VAT – Zero-rating – Sale-and-leaseback transaction – Appellant operating care homes – Property sold to third party as part of sale-and-leaseback transaction – Respondent commissioners considering appellant liable for VAT on self-supply – First-tier Tribunal allowing appellant’s appeal – Upper Tribunal and Court of Session upholding respondents’ approach – Appellant appealing – Whether sale-and-leaseback was disposal of entire interest in property – Appeal allowed
The appellant operated 25 care homes in Scotland and was part of a VAT group with BC and three other subsidiaries. An issue arose whether the appellant was liable to account for VAT on a self-supply as a consequence of BC’s sale of one of the care homes, which had been zero-rated when supplied to BC, to a third party (T) and the immediate leaseback of the home from T to BC. The respondent commissioners considered that involved the disposal of BC’s entire interest in the home. It sought to impose a VAT self-supply charge under para 36(2) of Schedule 10 to the Value Added Tax Act 1994 and issued a penalty notice.
The appellant appealed, arguing that BC did not dispose of its “entire interest” because the arrangements with the third party were a sale and leaseback, and one had to look at the substance of those arrangements as a whole. The respondents 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 agreement immediately thereafter to lease the property back to BC.
The First-tier Tribunal (FTT) considered that the sale-and-leaseback transaction was a composite transaction forming a commercial unity and allowed the appellant’s appeal: [2016] UKFTT 377 (TC). The Upper Tribunal and the Court of Session upheld the respondents’ approach: [2017] UKUT 410 (TCC); [2017] PLSCS 197. [2019] CSIH 7.
The appellant appealed. The key issue was whether under paragraph 36(2), construed purposively, the clawback was triggered by the sale and leaseback.
Held: The appeal was allowed.
(1) Paragraphs 35-37 of Part 2 of Schedule 10 to the 1994 Act provided a form of clawback of the benefit of zero-rating from the recipient of the zero-rated supply if either of two stated events occurred within ten years from the completion of the building: (i) under para 36(2), if the recipient had, since the beginning of the relevant period, disposed of its entire interest in the building; (ii) under para 36(3), if there was a change of use of the building from a qualifying to a non-qualifying use. Either of those events triggered a “self-supply” charge to VAT, payable by the recipient.
The issue in the present case was about the purpose of para 36(2). In the context of para 35-37, to the extent that the purpose behind para 36(2) could be discerned, it was concerned with avoiding conferring the large tax benefit of zero-rating upon a person who was not prepared to commit to the project of creating and operating a building for a specified socially desirable residential use for a substantial period after its completion. It achieved that purpose by a tapered clawback of the tax benefits received (from any kind of zero-rated supply), which decreased over time, and to nil once a ten-year commitment to the project by the recipient had been demonstrated.
(2) Applying para 36(2) was not about assessing the VAT consequences of a particular transaction. It applied when the recipient “has… disposed” of its entire interest in the relevant premises. That demanded an enquiry about the existence or otherwise of a state of affairs, namely whether a time came when the recipient no longer had any interest in the relevant premises because it had disposed of its entire interest therein. The existence of such a state of affairs then brought into existence a purely notional additional pseudo-transaction, namely a self-supply, not as part of any chain of real transactions but as a peg upon which to hang, and quantify, the clawback of a tax benefit.
The state of affairs which triggered para 36(2) could come about by a single transaction disposing of the entirety of the recipient’s interest, by two or more simultaneous transactions disposing together of the entirety, or by a series of successive transactions following the last of which the entirety had been disposed of. In such cases all relevant transactions might need to be considered to assess the aggregate of their combined effect. Thus, a series of simultaneous or successive disposals might need to be considered (in relation to the whole of the relevant premises or some physical part of them) to see whether their subject matter added up to the entirety of the recipient’s interest. But where there were successive or simultaneous transactions either way, some disposing of an interest and some acquiring another interest, then they would also have to be examined to discern their aggregate effect, to see whether at any time the recipient’s interest had thereby been reduced to zero. All that was required was something akin to basic mathematics, and a careful focus on the passage of time.
(3) In the present case, the sale and the lease were two simultaneous transactions, one by way of disposal by BC and the other by way of acquisition by BC, in each case of a much more than de minimis interest in the whole of the home. Each was a transfer of a major interest (although retention of a major interest was not necessary to protect the recipient from para 36(2)), and there was no moment when BC had neither of them. It followed that BC did not by its sale and leaseback of the home dispose of its entire interest therein and para 36(2) was not engaged.
(Per Lady Arden) Paragraph 36(2) fell to be interpreted in accordance with the principles of EU VAT law. However, it was clear from the decision in Mydibel v État belge (Case C-201/18) [2019] STC 1342 (given after the judgment of the Court of Session in the present case) that, when para 36(2) was so interpreted, the sale-and-leaseback transactions between BC and T fell to be treated as a single transaction which did not involve the disposal by BC of its entire interest in the home.
Philip Simpson QC and Roger Thomas QC (instructed by Brodies LLP of Edinburgh) appeared for the appellant; Kieron Beal QC and Ross Anderson (instructed by the Office of the Advocate General (Scotland)) appeared for the respondents.
Eileen O’Grady, barrister
