HMRC has recently confirmed its policy on the VAT treatment of sale and leaseback transactions. This follows the case of Balhousie Holdings Ltd v Commissioners for Her Majesty’s Revenue and Customs [2021] UKSC 11 earlier this year, which confirmed that a sale and leaseback does not always constitute a disposal of the “entire interest” in the relevant property.

General Rule

The construction or first sale by a developer of buildings intended as care homes, student residences, community centres and similar buildings are zero rated if its use in these ways is certified.

However, the property may be liable to VAT on a proportion on the amount originally zero rated if there is a change of use or the entire interest is disposed of within a 10 year period.

The Balhousie Decision

In Balhousie, Balhousie bought a zero rated care home and immediately entered a sale and leaseback arrangement. The premises continued to operate as a care home without interruption, but HMRC considered that Balhousie had disposed of its entire interest and tried to claim the VAT due.

The Supreme Court disagreed. They held that a simultaneous sale and leaseback did not amount to a disposal of its entire interest, as Balhousie always had an interest in the property as either owner or lessee without interruption.

New Policy

HMRC recently released a brief which confirms that there will not be a disposal of the entire interest when all of the following conditions are met:

  1. A qualifying property must have been purchased;
  2. When the property is sold, there must be an immediate lease in place, which is a seamless transaction with no time lapse;
  3. The lease must be for the remaining term of the 10 years from the original purchase date or longer; and
  4. 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.

If these conditions are not met then the sale of the property or the giving up of a long lease within the 10 year period will be subject to the self-supply charge for the remaining term, as you will have disposed of your entire interest in the property within the 10 year period.


The new policy provides clarity and will be a welcome relief for those contemplating a sale and leaseback of their property. However, HMRC has limited its guidance strictly to the facts of Balhousie. It has explicitly stated that it will continue to view sale and leasebacks as two separate transactions, a point accepted by the Upper Tier tribunal and Court of Session but not considered by the Supreme Court. This is inconsistent with the European Court of Justice decision in Mydibel v Belgium (Case C-201/18) [2019] STC 1342, and raises uncertainty about the extent to which pre-Brexit decisions of the ECJ will be relied upon.

If you have any queries about the above please contact Joanne McIvor of the Property department.

Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.

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