The case of Balhousie Holdings Ltd v HMRC concerned the zero-rated supply of a newly constructed care home. The key issue was whether the zero rating should be withdrawn under a statutory claw back provision due to the taxpayer entering into a sale and leaseback transaction with a finance company.
The claw back provision was engaged when the taxpayer disposed of their “entire interest” in the property. On a literal reading, the taxpayer sold its interest in the property and then acquired a lease from the purchaser, and so arguably disposed of its entire interest. However, the Supreme Court held that the sale and leaseback was a simultaneous transaction, meaning that the taxpayer had not disposed of their “entire interest” at any point. As a result, the claw back provision did not apply.
In reaching that decision, the Court took a purposive approach by considering what the statute was designed to achieve: the Court considered not just the claw back provision itself but the wider statutory context.
It held there was no “rational purpose” to the claw back being triggered by a financing by way of sale and leaseback but not by way of a loan on security. Rather, the purpose of the relevant statutory Chapter was to ensure that a taxpayer benefited from relief when they retained a long-term economic interest in the property (as the taxpayer had).
Lord Briggs held that “cases about taxation merely exemplify a general rule: ‘The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically’”. Lord Briggs went on to emphasise the general application of this by saying “it is nothing to the point that the present case is not about tax avoidance, or that it is about VAT rather than taxes on income and gains. This principle of statutory construction is of general effect”.
Until now, the courts have only used a purposive approach as a way of countering what has been seen as unacceptable avoidance, that could otherwise occur on a literal application of tax statute. This judgment highlights that the principle applies to taxes across the board, and so we can expect taxpayers in future to ask the courts to apply purposive reading of the legislation to avoid a clearly unfair result.