“A recent case that went through the Scottish courts has highlighted a number of the dangers that could occur when restructuring without considering the VAT consequences.”
Balhousie is a care home operator and had qualified to receive the construction of a new home at zero rate. The relief enables a care home operator, by issuing a certificate to the main contractor, to receive their construction services without paying VAT. The certificate states that the operator will use the building for a qualifying purpose for at least ten years.
Balhousie issued such a certificate. It was later decided that in order to raise finance, the home would be subject to a sale and lease back arrangement. By transferring its entire interest in the property to the lease back company, Balhousie had disposed of the property and no longer qualified for the zero rating relief. This therefore triggered a clawback of the relief which Balhousie had obtained by issuing the certificate.
It is important to remember, that any change to the extent of qualifying use or the disposal of the entire interest in the property is deemed to be a sale for VAT purposes, and consider the consequences ahead of the transaction. That consideration should look not only at the potential VAT liability of the disposal, but also any restrictions to past reliefs obtained.
Construction companies should exercise caution in accepting certificates for zero rating. If HMRC disagree with the basis on which the certificate was issued, the construction company could be held liable for the VAT which HMRC believe should have been charged. The constructor would then need to look to their customer to recover the VAT due from them.