Self-supply charge – whether VAT due on a self-supply on the sale and lease back of a zero rated relevant residential building

Balhousie Holdings Ltd – Court of Session

Balhousie Holdings Ltd operates a number of care homes. VAT group member, Balhousie Care (BC), had acquired a home by means of a zero rated purchase from a connected party outside the VAT group. The home was then sold by BC to Target Healthcare REIT (Target) who had an obligation to grant a long lease back to BC. The issue is whether the taxpayer was liable to VAT on a self-supply. Schedule 10, para 36 VATA 1994 (as amended in March 2011) imposes a standard rated self-supply charge where a person, who has received a zero rate supply in a qualifying building, disposes of his entire interest in that building within ten years.

HMRC argued that the self-supply charge was due as the freehold of the building had been sold and that was the disposal of the entire interest. BC then regained an interest by way of the lease back which, though linked to the sale, was a separate transaction from the sale. HMRC added that VAT is a transaction tax and therefore the transactions had to be looked at separately. The taxpayer argued that you should not separate the transactions and look at them in isolation as they depended on each other and imposed reciprocal obligations. In its view, economically there had been no change of use arising from the change of owner. BC continued to occupy the building for a qualifying purpose. Parliament could not therefore have intended the self-supply to apply in this situation. The earlier FTT found for the taxpayer. HMRC appealed.

At the earlier UT, HMRC said that when considering the meaning of disposal of the entire interest, this related back to the major interest that was the subject of zero-rating. When this was sold or assigned, a party had disposed of its entire interest. HMRC argued that it did not matter if it retained a right or regained a separate right in the building.

The UT noted how in BLP (C-4/94) the ECJ emphasised that each transaction in a “chain of transactions” must be examined separately for VAT purposes to ascertain objectively what input tax or output tax was deductible and payable. The UT added that, for the purposes of European VAT legislation, it is not permissible to take a global view of a series of transactions in the chain of supply. The UT concluded that the FTT was deflected from the correct approach.

The UT proceeded to consider the construction of paragraph 36(2). Applying this to the facts, the UT concluded that by the sale of the care home to Target, BC “disposed of its entire interest” in the home. It did not matter that, by a further linked transaction, it acquired under the lease a right of a similar character. HMRC’s appeal was allowed.

The taxpayer has now appealed to the Court of Session, which has upheld the UT decision for the same reasons. Given VAT is a transaction based tax it is hard to see how a different conclusion could be reached. Although BC still occupies and uses the building for a relevant purpose, that use is based on a different right arising from a different transaction (the lease back).


While it may seem unfair that a self-supply charge has arisen, and counter intuitive to the purpose of the VAT relief for relevant residential buildings, since there has been no change of use, the court’s decision looks to be correct. The entire interest was sold and, irrespective of a change of use or not, such a disposal is one of the factors that triggers the self-supply charge.