Charities could save millions after Supreme Court VAT ruling

The case relates to tax due on the construction or purchase of zero-rated buildings

The Supreme Court in London
The Supreme Court in London

Charities stand to save millions of pounds in VAT when constructing or purchasing zero-rated buildings after the Supreme Court ruled such arrangements are not subject to a change of use charge.

The court overturned an earlier decision that VAT should be paid in certain circumstances as part of an eight-year legal battle between Balhousie Care, a commercial care home operator, and HM Revenue & Customs. 

The case concerned the application of clawback provisions that apply where the construction or purchase of a new building is made on a zero-rated basis, and the building is later disposed of within the first 10 years of life. 

Balhousie Care had issued a zero-rating certificate for the construction of a residential care home, which saved it about £800,000 in VAT on the £4m price. 

To finance this the company completed a sale and leaseback arrangement.

Zero-rating for a relevant residential purpose or charitable purpose is only available on the first purchase or long lease of a new building. 

If the building is then disposed of within 10 years a VAT update is required – adjusted to the amount of the 10-year period remaining. 

HMRC said the sale and leaseback was a disposal, and so the VAT had to be accounted for.

But the Supreme Court disagreed, overturning an earlier tribunal decision. 

It said that the care home operator had not disposed of its interest and therefore the zero-rating certificate was valid.

Graham Elliot, technical adviser at the Charity Tax Group, said in a statement: “Any intelligent lay observer would say that the sale and leaseback had at no point involved the entire disposal of its interest by the care home operator. [The judgment] describes HMRC’s arguments as ‘close to fanciful’.”

Helen Elliott, tax partner at the charity auditors Sayer Vincent, said common sense had prevailed. 

“If a charity zero-rates the construction or purchase of a relevant residential or relevant charitable purpose building, it can finance that via a sale and leaseback without triggering a change of use charge, but only if the sale and leaseback are simultaneous,” she said. 

“There must be no time gap between the sale and the leaseback.

“Purchasing a new building, freehold or leasehold, by a charity is very expensive, so the VAT is also substantial if payable. Therefore, very careful checking of the rules in advance of signing anything is vital.”

Caron Bradshaw, chief executive of the Charity Finance Group, said: “Irrecoverable VAT has long been a drain on the resources of charities.

“The Supreme Court's decision avoids undermining the steps that some organisations take to release funds to work harder for beneficiaries, delivering public benefit. 

“Had the decision gone the other way, it would have had potentially far-reaching negative consequences and would have been deeply disappointing.”

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