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HMRC v Balhousie Holdings

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In HMRC v Balhousie Holdings [2017] UKUT 410 (20 October 2017), the UT found that a sale, which was followed by a lease back, was a disposal of an ‘entire interest’ for the purpose of VATA 1994 Sch 10 para 36(2), so that it was a deemed a standard rated supply.

Balhousie operates care homes. The Huntly care home had been zero rated when supplied to Balhousie. Balhousie had then entered into a sale and leaseback transaction; and the issue was whether the sale had constituted the disposal of an ‘entire interest’, thus triggering VATA 1994 Sch 10 para 36(2).

The UT observed that the question was whether the relevant arrangements should be viewed as a composite transaction, the net result of which was that Balhousie Care (BC) regained a relevant interest in the Huntly care home under the lease; or whether each individual transaction (including the disposal) was subject to a distinct VAT analysis. It added that: ‘The conventional transactional approach applied to VAT should not be subsumed into an approach that gives primacy to the “commercial reality” or the “overall effect” of a transaction, if the relevant taxing statue does not enjoin that approach.’

The UT rejected Balhousie’s argument that it enjoyed the same rights before and after the transactions, so that there had been no disposal of BC’s entire interest in the Huntly care home. The tribunal pointed out that the crucial difference was that Balhousie no longer derived its right of occupation from the original zero rate supply, but rather from the lease. Balhousie had therefore disposed of its entire interest in the Huntly care home and the fact that it had acquired a similar interest under the lease was irrelevant.

Read the decision.

Why it matters: The UT observed that for the purpose of VAT, one looks ‘at transactions individually, component transaction by component transaction’. The tribunal added that this approach may be ‘in contradistinction’ to other forms of tax (notably income tax and capital allowances). Graham Elliott commented: ‘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 UT does insufficient justice to the concept of the “entire interest”.’ (‘What does the word “entire” mean?’, Tax Journal, 27 October 2017.)

Also reported this week:

Issue: 1375
Categories: Cases