Balhousie Holdings Ltd v Revenue and Customs (Scotland) [2021] UKSC 11

A care home operator financed its acquisition through a sale and leaseback arrangement. HMRC argued this triggered a VAT self-supply charge under paragraph 36(2) of Schedule 10 to VATA. The Supreme Court held that since the operator retained a leasehold interest throughout, it had not disposed of its 'entire interest' and no charge arose.

Facts

Balhousie Care Ltd (BCL), part of the appellant’s VAT group, acquired the Huntly Care Home from Faskally Care Home Ltd through a zero-rated first grant. To finance this acquisition, BCL simultaneously entered into a sale and leaseback arrangement with Target Healthcare REIT Ltd. BCL sold its ownership interest to Target whilst simultaneously acquiring a 30-year lease back from Target. The transactions were structured so there was no moment when BCL lacked any interest in the property.

The Zero-Rating and Self-Supply Scheme

Under Group 5 of Schedule 8 to VATA, certain supplies connected with construction of buildings for relevant residential purposes (including care homes) are zero-rated. Part 2 of Schedule 10 provides for a claw-back mechanism through a ‘self-supply charge’ if certain events occur within ten years of the building’s completion.

Issues

The central issue was whether the sale and leaseback constituted a disposal by BCL of its ‘entire interest’ in the care home under paragraph 36(2) of Schedule 10 to VATA, thereby triggering a self-supply charge.

Judgment

Majority Reasoning (Lord Briggs, with whom Lord Hodge, Lord Sales and Lord Carloway agreed)

Lord Briggs held that paragraph 36(2) requires an inquiry into whether there was ever a time when P no longer had any interest in the relevant premises. The court stated:

“A reasonably intelligent and well-informed reader of paragraph 36 in its statutory context would be forgiven for thinking it tolerably clear that paragraph 36(2) would trigger a self-supply charge if, but only if, there came a time, during the relevant ten year period, when P no longer had any interest in the relevant premises, including any leasehold interest.”

Lord Briggs rejected HMRC’s argument that ‘entire interest’ means only the interest acquired under the earlier zero-rated grant:

“More fundamentally, this construction contended for by HMRC simply fails to make sense of sub-paragraph (2), whatever rational purpose may be assigned to it.”

The judgment emphasised that the statutory language uses non-technical terms and focuses on a state of affairs rather than characterising individual transactions:

“The sub-paragraph does not ask whether a particular transaction amounts to such a disposal. Rather, it demands an enquiry about the existence or otherwise of a state of affairs, namely whether a time came when P… no longer had any interest in the relevant premises.”

Lady Arden’s Concurrence

Lady Arden agreed with the outcome but through different reasoning, applying EU VAT law principles. Relying on Mydibel SA v État belge, she held that a sale and leaseback for funding purposes should be treated as a single transaction for VAT purposes, with the composite effect being that BCL did not dispose of its entire interest.

Implications

This decision confirms that care home operators and similar entities can use sale and leaseback arrangements to finance property acquisitions without triggering VAT self-supply charges, provided the transactions are genuinely simultaneous and the operator retains an ongoing interest (even a leasehold). The judgment provides important clarity on the interpretation of ‘entire interest’ under paragraph 36(2), confirming it means any interest whatsoever, not merely the specific interest originally acquired. The case also illustrates the continuing relevance of EU VAT principles to the interpretation of UK zero-rating provisions.

Verdict: Appeal allowed. The sale and leaseback did not constitute a disposal of BCL’s entire interest in the care home, and therefore paragraph 36(2) of Schedule 10 to VATA was not triggered and no self-supply charge arose.

Source: Balhousie Holdings Ltd v Revenue and Customs (Scotland) [2021] UKSC 11