Nature of a sale and leaseback transaction for VAT purposes

In 2013 Balhousie acquired a new care home Huntly from a developer. The sale was zero rated. Balhousie entered into a sale and leaseback transaction with Target to finance the deal. Under the arrangement Huntly was given to Target which then granted a lease of the home to Balhousie for 30 years.

The issue was whether the sale had constituted the disposal of an ‘entire interest’ (VATA 1994 Sch 10 para 36(2)). Balhousie said it had not disposed of its ‘entire interest’ in the property because the arrangements with Target were a sale and leaseback. HMRC disagreed and sought to claw back the VAT.

The First-tier Tribunal allowed the taxpayer’s appeal but the Upper Tribunal allowed HMRC’s appeal. The Court of Session then concluded that Balhousie had disposed of its entire interest because the sale disposed of exactly the interest which it had...