Construction Self-Supply Charge: HMRC Revises Meaning of “Entire Interest” Following Defeat in Supreme Court

October 25, 2021

HM Revenue & Customs (HMRC) has amended its meaning of “entire interest” in the VAT treatment of the construction self-supply charge following a landmark Supreme Court ruling.

If you supply building and construction services, here’s what you need to know.

What is the self-supply charge?

According to the Institute of Chartered Accountants in England and Wales (ICAEW), a zero-rating of VAT is usually 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, such as a care home.

But VAT may be payable if the taxpayer disposes of their “entire interest” or there is a change of use of the building within 10 years. This is known as the self-supply charge.

What is changing?

The legislation became subject of a Supreme Court ruling this year after the sale and leaseback of a care home. The self-supply was charged by HMRC, but the Supreme Court found that the transaction did not amount to a disposal of an “entire interest” because “the simultaneous sale and leaseback meant that [the developer] always had an interest in the property either as owner or lessee without interruption”.

This meant that there was no break in the operation of the property as a care home throughout the transfer from the sale to the lease agreement, the Supreme Court said.

As a result of the case, HMRC has now revised its guidance to the following:

“The disposal of your entire interest in a property will not occur when all the following conditions are in place:

  • 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 10 years from the original purchase date or longer
  • 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.”

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