Nobody likes paying VAT and at 20% it can be a significant liability on property transactions.
If certain conditions are met, property can be acquired by way of a transfer of a going concern (TOGC). TOGC treatment is mandatory and where there is a TOGC this means that the transfer falls outside the scope of VAT and VAT is not therefore chargeable.
The main UK law concerning TOGCs is the Value Added Tax (Special Provisions) Order 1995, which is derived from articles 19 and 29 of the Principal VAT Directive (Directive 2006/112/EC).
Property transactions
- TOGCs are relevant to various property transactions, including:
- occupiers disposing of property as part of a business sale;
- investors disposing of property held for letting; and
- developers disposing of a site in the course of development.
Following Robinson Family Ltd v Commissioners for HM Revenue and Customs [2012] UKFTT 360 (TC); [2012] PLSCS 159, HM Revenue and Customs (HMRC) confirmed that the grant of a lease can, in certain circumstances, be a TOGC, as can the surrender of a lease.
What are the TOGC conditions?
For the transaction to comprise a TOGC a number of conditions need to be met. HMRC considers the main conditions to be:
- the assets must be sold as part of the transfer of a “business” as a “going concern”;
- the assets are to be used by the purchaser with the intention of carrying on the same kind of “business” as the seller (but not necessarily identical);
- where the seller is a taxable person, the purchaser must be a taxable person already or become one as the result of the transfer;
- in respect of land which would be automatically standard rated or which the seller has opted to tax, the purchaser must notify HMRC that it has opted to tax the land by the relevant date (see below), and that the option will not be disapplied;
- where only part of the “business” is sold it must be capable of operating separately;
- there must not be a series of immediately consecutive transfers of the “business”.
On the grant of a lease, the grantor must also dispose of at least 99% of the value of the property if the grant is to be a TOGC. The grantor needs to compare the value of the property immediately before and after the grant to determine this.
When an investor sells a property, HMRC accepts that the letting business does need to have actually commenced, or
be in respect of the entirety of the property for the sale to be a TOGC.
HMRC accepts that the following can be TOGCs:
- the sale of a building where the tenants are currently enjoying a rent-free period;
- the sale of a property subject to a contractual agreement for lease;
- the sale of a partially let property.
Option to tax
Any option to tax made by the purchaser must be made and submitted to HMRC prior to the date of any taxable supply by the seller. If there is a deposit payable then, unless this goes into a stakeholder account, the purchaser must make an option to tax and submit it to HMRC prior to the date of payment of the deposit. If the deposit is paid into a stakeholder account, the purchaser will have up to immediately before completion to make and submit its option to tax to HMRC.
VAT registration of the purchaser
Many property purchases are undertaken by new companies (Newco) that are set up specifically for the relevant acquisition. Often these companies are not registered for VAT on completion. This will not prevent there from being a TOGC if the company is liable to be registered for VAT. In these circumstances if the purchaser is a UK company it will be treated as liable to be registered if:
- the seller’s taxable supplies (in respect of the business being transferred) in the previous 12 months exceeded the VAT registration threshold; or
- there are reasonable grounds for believing the purchaser’s taxable supplies in the 30 days immediately after completion will exceed the current VAT registration threshold (£83,000).
As regards non-UK purchasers, the position on when they are liable to be registered for VAT is less clear, but it is still possible for these purchasers, if not VAT-registered at completion of the relevant transaction, to be liable for VAT registration and to acquire property as a TOGC.
If the purchaser is not liable to be registered for VAT and is not registered for VAT at completion then the relevant sale will not be a TOGC. The fact that the purchaser may have applied to be registered for VAT prior to completion is not enough and the transfer will not be a TOGC even if the purchaser’s VAT registration is, when received, backdated to a date prior to completion.
Nominee purchasers
Where the purchaser(s) are nominees holding the legal title on trust for the beneficial owner, a TOGC is technically not possible because the actual business will be deemed to be carried on by the beneficial owner. However, HMRC will allow the parties to choose to treat the beneficial owner as the purchaser (for VAT purposes) in order to decide whether or not a TOGC takes place. All the parties must agree on the treatment of the sale and HMRC expects the parties to evidence this in a notice of agreement. The beneficial owner must be disclosed and cannot be kept secret.
VAT groups
The transfer by one company of a let property to another company where the acquiring company is in the same VAT group as the tenant of the property was previously considered not to be a TOGC. Following Intelligent Managed Services Ltd v Commissioners for HM Revenue and Customs [2015] UKUT 0341 (TCC) it does, however, now appear that there could be a TOGC in these circumstances. The reason for the previous position is that VAT group members are not considered to make VAT-able supplies to one another and therefore there could be no ongoing property letting business. HMRC is still considering the implications of this case.
Capital goods scheme (CGS)
The CGS is often of concern on a TOGC. It applies to some real estate interests costing at least £250,000 plus VAT. Refurbishments can also be CGS items. Where a property is a CGS item, the property owner is required to monitor the use of the property for the “adjustment period” (circa 10 years) and it may be required to repay some of the VAT initially recovered from HMRC on the purchase of the property if its use changes.
On a TOGC the adjustment period will pass to the purchaser and it will become responsible for making any of the remaining adjustments. This can in certain circumstances give rise to a clawback of VAT from the party that did not initially recover it. To give a basic example:
Company A acquired a fully let property in 2016 for £10m plus VAT (of £2m). Company A recovered the £2m VAT from HMRC. Company A sells the property to company B in 2019 as a TOGC. Company A and company B have both opted to tax the property. The remaining seven years of the adjustment period transfers to company B. In 2021 company B ceases to make taxable supplies of the property. The adjustment period remaining at that point is five years. HMRC can recover £1m (being half of the £2m VAT received by company A as the adjustment period is halfway through) from company B.
Whether the property is a CGS item is typically covered off in the sale contract and the replies to Commercial Property Standard Enquiries. It is often the case, however, that sellers have very little information on the CGS and are therefore reluctant to give purchasers any comfort on this issue. This is a very unsatisfactory position and unless the purchaser intends to simply carry on the same business as the seller, in which case the CGS should not be an issue, it can give rise to real concerns for purchasers.
Why this matters
Ensuring a transaction is a TOGC can lead to significant tax savings. Even if the VAT is only a cashflow cost for the purchaser, this can often be unacceptable on those transactions where the purchase price runs into the millions.
The more significant issue is the fact that stamp duty land tax (SDLT) is payable on VAT and the SDLT will be an absolute cost even if the VAT can ultimately be recovered from HMRC. In the larger transactions this can again add an unacceptable cost to the purchase. For example, on a purchase of a commercial property for £50m plus VAT (£10m) the additional SDLT on the VAT will be £500,000.
On a TOGC, purchasers need to understand the CGS position of the property as failure to do so could lead to unexpected VAT costs. Trying to obtain all of the relevant information can, however, be particularly difficult and where it cannot be obtained purchasers needs to be extra vigilant that no future activities undertaken by it in respect of the property give rise to a clawback of VAT for it. If, for example, the TOGC is the acquisition of a property letting business, professional advice should be sought before any onward sale or refurbishment/redevelopment of the property to try to ensure there are no CGS issues lurking.
Treating a transaction as a TOGC when actually it is not one could lead to late payments of VAT for a seller, which can give rise to interest and possibly penalties. In these circumstances, whether the VAT, interest and penalties can be recovered by the seller from the purchaser will depend on the drafting of the contractual documentation.
If the VAT cannot be recovered from the purchaser, the sum received by the seller will be deemed to be inclusive of VAT and the seller will ultimately be out of pocket if it has to account to HMRC for VAT on the sale.
For these reasons, it is imperative the seller is satisfied that the sale is a TOGC and that the sale contract provides for the seller to recover VAT from the purchaser in the event that the sale is not a TOGC.
Whether interest and penalties can be recovered in addition to the VAT will often depend on the reason for the transaction not being a TOGC.
Alex Barnes is a tax partner at Irwin Mitchell
