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Balhousie: interpreting a tax statute

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The Upper Tribunal decision in Balhousie Holdings Ltd [2017] UKUT 410 (TCC), gives an example of the impact of fractionally different views of a single word in legislation, even in our era of ‘purposive’ interpretation of the tax statutes. Here, the spotlight lands on the meaning of ‘entire’, as found in VATA 1994 Sch 10 para 36(2). This relates to the deemed standard rated supply where a building, whose purchase was zero rated for ‘relevant residential’ use, is disposed of. The context of ‘entire’ is as follows: ‘P has … disposed of P’s entire interest in the relevant premises (or part).’ ‘Entire interest’ is not defined in VATA 1994, so must take its ordinary meaning, in context.

The circumstances were: the taxpayer provides care home services. The buildings were zero rated under the relevant residential purpose banner, making them subject to a deemed supply if, within ten years, the ‘entire interest’ was disposed of. The taxpayer sold its interest to a financier, on sale and leaseback terms. So, the building was sold, but only so it would be leased back.

HMRC had argued that the sale must be viewed separately from the leaseback. Accordingly, the taxpayer disposed of his ‘entire interest’, albeit he (irrelevantly) received a different interest milliseconds later. The taxpayer argued that this was a false dissection, and that his interest merely changed character via the indivisible scheme of transactions, which could not be deemed to involve the disposition of his ‘entire’ interest.

To cut a long story short, the First-tier Tribunal (at [2016] UKFTT 377 TC) agreed with Balhousie, but the Upper Tribunal has just issued a decision in favour of HMRC.

It is a trite point that a higher court should only overturn a lower court if the latter is clearly in error, and not merely to replace it with a preferred view. What caused the Upper Tribunal to disagree that much with the FTT?

The nub of the issue was whether to interpret each transaction in isolation, or to interpret a group of transactions, as a whole. The traditional approach, advanced in the House of Lords decision in Robert Gordon College [1995] STC 1093, is to view each transaction separately (as confirmed in the ECJ decision of BLP Group Plc (Case C-4/94)). The Upper Tribunal did not interpret the leaseback as negating the sale of the property. The purpose of the legislation, if such was discernible from the parliamentary records, could not be used to subvert the plain operation of VAT, and the black letter of the law. Balhousie had disposed of its interest entirely, and taking back a lease did not change that fact. The FTT had been gulled by a story that did not withstand scrutiny.

I’m afraid I don’t agree. I prefer the FTT’s view.

Whilst it is true that VAT ought to be analysed transaction by transaction, it is also the case that each word in the legislation must be given weight and not be rendered superfluous. The Upper Tribunal does insufficient justice to the concept of the ‘entire’ interest. If the clawback arises upon disposal of the interest that the tax payer acquires, there is no need to refer to the ‘entire’ interest, since that would be covered by merely referring to the ‘interest’. If one postulated that this was to allow a party to grant a lease out of its interest without a clawback, there would still be no need for ‘entire’ to be used, since granting a different interest does not involve any disposal of one’s own. If a freeholder grants a 200 year lease, he is no less the freeholder for that. ‘Entire’ cannot refer to whether any physical part of the premises is retained, since the provision refers to application to parts of the building, so ‘entire’ cannot allow alienation of part but not the whole. So, what does ‘entire’ mean?

I am not satisfied that the Upper Tribunal has explained this. It is true that VAT works transaction by transaction, but that does not mean we ignore words in the statute which could be interpreted in the light of other transactions, and only make reasonable sense if one does so. Parliament’s use of ‘entire’ requires us to find a role for that word. That role is probably to ensure that the self-supply does not arise where the party has any remaining interest. At no stage did Balhousie lack such an interest, since the sale was conditional upon the leasing back. If it held that occupational lease, using it for relevant residential purposes until at least ten years after the anniversary of the original purchase, the conditions would be satisfied.

The law refers to ‘P’s interest in the premises’, which is not the same as ‘the specific interest in land which P happened to acquire on a zero rated supply’. The phrase seems to demand interpretation on that basis, and it eminently suits the purpose (of which there can surely be no doubt). Only by reviewing the interdependent contracts in the sale and leaseback can the reference to the ‘entire interest’ be given its correct meaning within the usual transaction by transaction mode of VAT analysis. The FTT understood this, and, in my view, decided the case correctly. 

Graham Elliott, City & Cambridge Consultancy Ltd (

Issue: 1374
Categories: In brief