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Change in VAT treatment of construction self-supply charge


Published: 13 Oct 2021 Update History

HMRC has revised its policy on meaning of ‘entire interest’ for the purposes of the construction self-supply charge following the Supreme Court’s judgement in the Balhousie Holdings case.

In its latest Revenue and Customs Brief (13 of 2021), HMRC has amended its policy on the VAT treatment of the construction self-supply charge and what it considers constitutes a disposal of an “entire interest”.

A zero-rating of VAT is available on four classes of supplies made in connection with the construction or conversion of buildings intended to be used for relevant residential or charitable purposes, including use as a care home.

However, a claw-back can arise via a self-supply charge where, within 10 years, the taxpayer disposes of their entire interest or there is a change of use of the building.

This legislation has recently been the subject of a judgement in the Supreme Court following a sale and leaseback of a recently constructed care home where HMRC sought to apply the self-supply charge (Balhousie Holdings Ltd v Commrs for HMRC [2021] UKSC 11).

The Supreme Court decided that a sale and leaseback did not amount to a disposal of an entire interest.

As a result, in Revenue and Customs Brief 13 (2021), HMRC has now revised its policy and considers that a disposal of an entire interest will not occur when the following four conditions are all met:

  • a qualifying property must have been purchased;
  • when the property is sold, there must be an immediate lease in place, which is a seamless transaction with no time lapse;
  • the lease must be for the remaining term of the ten years from the original purchase date, or longer; and
  • the property must be continually used or operated for a qualifying purpose, meaning the business suffers no break in trade during the sale and leaseback.
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