Indirect tax news from the past week
RCB 13(2021): self-supply charge on sale and leasebacks following Balhousie
Businesses which buy certain zero-rated properties such as care homes can face a self-supply charge if they dispose of their entire interest in the property within 10 years. In Balhousie, the Supreme Court ruled that a taxpayer had not disposed of its entire interest when it financed the development of a care home through a sale and leaseback. In RCB 13(2021), HMRC have published their revised policy in light of this judgment. Provided that the property continues to be used for a qualifying purpose, there is no gap between the sale and the leaseback, and the lease runs at least for the remainder of the 10-year period from when the property was purchased, then HMRC will accept that a self-supply charge does not arise. Any business that has accounted for VAT under the self-supply charge as a result of financing a relevant property by way of sale and leaseback should consider whether it can reclaim the VAT. (Contact: Ben Tennant).
Boehringer II: output tax adjustment on pharmaceutical rebates – CJEU
Prescription drugs in Hungary are partly paid for by patients, and partly subsidised by the NEAK (the state health insurance body). Pharmaceutical distributors are not allowed to run commercial promotions for their drugs, but can help fund the state subsidy. Boehringer Ingelheim agreed to make payments to the NEAK, in order to guarantee that its products would continue to be subsidised. The CJEU has ruled that it should be allowed to adjust its output tax accordingly. In effect, Boehringer was reimbursing the NEAK part of the consideration it had received from its wholesale customer, and it should not be subject to VAT on a greater amount than it received. Applying the CJEU’s 2017 judgment in Boehringer I, the NEAK should be treated as a final consumer. Therefore, if Boehringer paid amounts to the NEAK then it should be entitled to adjust its output tax regardless of whether the payments were required by statute or agreed under contract. The CJEU recognised that the Hungarian tax authorities might legitimately expect Boehringer to produce invoices to evidence the VAT adjustment (and the NEAK had not issued any) but concluded that Boehringer should be allowed to evidence the payments by other means. (Contact: Oliver Jarratt).
Silver Sea Properties: care homes and the builders’ block
Care home groups frequently use separate property companies (“PropCos”) to develop new care homes, as it can be easier for a PropCo to secure finance for the development than it would be for the associated operating company (“OpCo”) that will become its tenant. The lease from PropCo to OpCo will normally be zero-rated, but as shown by the FTT’s decision in Silver Sea Properties (Leamington Spa) Ltd complications can arise around the VAT treatment of furniture, fixtures, and equipment. The FTT ruled that SSP (the PropCo) had incorporated much of the furniture into the property (as it has to be screwed to the wall in care homes for the safety of residents) but that fitted furniture could not qualify as “building materials”. Consequently, the builders’ block prevented SSP from recovering input tax on wardrobes, bookcases, desks, etc. SSP had also procured items such as crockery, first-aid kits, and cleaning materials for OpCo, as part of what it described as a “turnkey development”. However, although SSP could recover input tax on such items, the FTT ruled that they were supplied to OpCo separately, rather than as part of the lease. Therefore, PropCo should have charged VAT to OpCo on such items. (Contact: Jacqui Nicholls).
Icade Promotion: margin scheme on property – CJEU
Icade Promotion purchased land in France (without VAT) for a residential property development. It divided the land into lots, built roads and installed utilities, and then sold the lots to private individuals as building land. France has implemented a margin scheme for the purchase and resale of building land, but Icade argued that it should not account for margin scheme VAT, as it had not paid VAT when purchasing the land (e.g. from private individuals). In the CJEU’s judgment, margin schemes are meant to ensure that assets which re-enter the “commercial circuit” after a previous sale to a final consumer are not repeatedly subject to VAT on their full value. The CJEU concluded that the margin scheme applied not just when Icade’s immediate purchases were subject to VAT, but also when VAT had been accounted for on earlier sales of the land (even if it was subsequently acquired by Icade without VAT). The CJEU also ruled that the status of the land as “building land” was not changed unless the infrastructure put in place by Icade involved the construction of a building. Subject to the national court confirming that the land always qualified as building land, the margin scheme had properly been applied to Icade’s supplies. (Contact: David Walters).