VAT – Sale of land – Transfer of going concern – Value Added Tax (Special Provisions) Order 1995 – Second respondent purchasing property from first respondent and relocating there along with its existing tenants – First respondent entering into prior agreement for lease of room in property to one of those tenants – Whether than arrangement resulting in transfer of going concern exempt from VAT under article 5 of 1995 order – Appellants’ assessment of VAT overturned by first-tier tribunal – Whether agreement for lease forming part of first respondent’s letting business transferred to second respondent – Whether VAT assessment made out of time – Appeal dismissed
The second respondent was a property development company registered for VAT with a business activity of property trading and letting. In 2005, it purchased a property in London, WC1, with sitting tenants and elected to waive the VAT exemption in respect of it. The second respondent then obtained a surrender of the tenant’s lease and refurbished the property before marketing it for letting. The first respondent, a registered charity engaged in predominantly non-business or VAT-exempt activities, was interested in purchasing the property in order to relocate there along with its two existing tenants, which were similar organisations to which it let space in its existing premises.
Since the second respondent was carrying on a property business, the parties were advised that VAT on the transaction could be saved if it were structured as a transfer of a going concern within the meaning of article 5 of the Value Added Tax (Special Provisions) Order 1995. In order to achieve that effect, one of the first respondent’s tenants entered into an agreement for lease with the second respondent, under which it was to take a lease of a single room in the new premises for a premium of £1,000. That agreement was condition on the respondents exchanging contracts for the sale of the property by a given date, with the premium repayable if that condition was not met or if completion of the lease did not occur by March 2008.
Later that day, contracts were exchanged on the sale of the property to the first respondent for £17.4m with the benefit of the agreement for lease. The first respondent elected to waive the VAT exemption in respect of the property. The sale was completed in January 2008 and the first respondent’s tenants each took a leases of a room in the new premises.
In July 2010, the appellants decided that the sale was a standard-rated supply and informed the second respondent that VAT was payable on the purchase price. The first-tier tribunal (FTT) reversed that decision on appeal, holding that there had been a transfer of a going concern and that, in any event, the appellants’ VAT assessment had been made outside the time limits prescribed by section 73(6) of the Value Added Tax Act 1994. The appellants appealed.
Held: The appeal was dismissed.
(1) The exemption from VAT in respect of a transfer of a going concern was intended to implement article 5(8) of the Principal VAT Directive 2006/112/EC and had to be construed in conformity with that provision, the purpose of which was to facilitate transfers of undertakings by simplifying them and avoiding overburdening the transferee with VAT. In order for a transaction to qualify as a transfer of a going concern, there had to be a transfer of an asset together with a further element of a transfer of a business, undertaking or economic activity or part of one. A transfer of an undertaking did not occur merely because its assets were transferred. All the elements transferred had together to be sufficient to allow an independent economic activity to be carried on. The relevant economic activity could consist of several consecutive business transactions. In order to determine whether there was a transfer of a going concern, it was necessary to make an overall factual assessment of the circumstances of the transactions in issue, which could include the intentions of the parties. The test was one of substance rather than form.
In the instant case, there was no transfer of a going concern by the second respondent, as vendor, to the first respondent, as purchaser. It was true that the second respondent had a letting business in relation to the property and that its business activity amounted to the exploitation of the property, such that the property was an asset of that business. It was also true that the first respondent intended to, and did, let the property to tenants after purchasing it from the second respondent. However, the fact that a vendor had a business letting a property before a sale, and that the purchaser also bought the property with the intention of letting it, was not sufficient to make the sale a transfer of a going concern. Something else was needed. An additional transfer of a lease or agreement for lease might normally suffice for that purpose where the lease or agreement for lease which was transferred could truly be described as part of the vendor’s business. However, the agreement for lease in the instant case was different since it was never part of the vendor’s business at all. The putative tenant came directly from the purchaser. Although it wished to become a tenant of the new premises, that was because of its pre-existing relationship with the purchaser. The grant of the lease by the purchaser to the tenant was unconnected to the agreement between the vendor and the tenant; that agreement was not what caused the tenant to become a tenant of the purchaser in the new premises. In those circumstances, there was no transfer of a going concern.
(2) The judge had nonetheless correctly held that no liability to VAT arose on the transaction since the appellants’ assessment had been made outside the time limit prescribed by section 73(6) of the 1994 Act. There was no doubt that the assessment was made outside the primary two-year period under section 73(6)(a). The judge had also been entitled to find, on the evidence before him, that the assessment had been made more than one year after facts sufficient to justify the assessment came to the knowledge of the appellants, with the result that the assessment fell outside the alternative limitation period in section 73(6)(b).
James Puzey (instructed by the legal department of HM Revenue and Customs) appeared for the appellants; Michael Conlon QC and David Scorey (instructed by Hogan Lovells) appeared for the respondents.
Sally Dobson, barrister
