VAT – Transfer of going concern – Section 49 of the Value Added Tax Act 1994 and article 5 of VAT (Special Provisions) Order 1995 – Appellant building commercial units and selling by way of grant of subleases – Whether sale of such unit a “non-supply” for VAT purposes consisting of transfer of going concern in form of property letting business – Whether relevant transfer of assets occurring for that purpose where appellant creating new sublease rather than selling own interest – Appeal allowed
The appellant property company acquired a 125-year headlease of a site on which it constructed a number of commercial units for onward sale. Owing to the terms of the headlease, which prohibited assignments of part only of the demised premises, the appellant effected the sales by way of the grant of subleases for terms expiring three days before the headlease. The terms of the subleases provided that the purchaser could either occupy, sell by way of a further long sublease or sublet at a commercial rack rent. The appellant sold one of the units to a purchaser for £1.6m, subject to a proposed letting to a prospective tenant who had expressed an interest in taking the second floor. In the event, that subletting did not materialise although the purchaser later sublet one of the three floors in the unit to a different tenant. The purchaser occupied the other floors for its own purposes.
The appellant sought to characterise its sale of the unit as a transfer of a going concern (TOGC) in the nature of a property letting business, so as to avoid liability for VAT on the transaction. It relied on the TOGC provisions of section 49 of the Value Added Tax Act 1994 and article 5 of the VAT (Special Provisions) Order 1995, by which transfers of going concerns were regarded as “non-supplies” for VAT purposes. However, a VAT assessment was raised against the appellant in which the sale was treated as a taxable supply. The assessment apportioned the tax to take account of the fact that the insurance broker was actively using two-thirds of the unit and was using the remaining one-third as a property letting business. That assessment was upheld on review and the appellant appealed.
The respondents sought to uphold the reviewing officer’s conclusion that, regardless of whether a property letting business was carried on, the TOGC provisions did not apply to the sale of the unit since there was no transfer of assets within the meaning of the TOGC provisions but rather the creation of a new asset in the form of the sublease.
Held: The appeal was allowed.
In order for a TOGC to arise, the legislation required that assets were deployed in a business, which was the subject of the transfer, and that the relevant business continued both before and after the transfer. It was settled law that the tribunal was required to have regard to the substance rather than the form of the transaction: Kenmir Ltd v Frizzell [1968] 1 WLR 329 applied. Preparatory acts could themselves constitute a business for VAT purposes and the respondents did not dispute that the appellant had carried out sufficient preparatory acts to constitute a letting business in relation to the unit. That letting business would have entitled the appellant to sublet on rack-rental terms and to collect rent in relation to the occupancy rights that would then be granted to subtenants. On the sale of the unit, the right to conduct letting activities had passed to the purchaser. The lettings business that had existed before the point of transfer had also existed after that transfer. The assets required for that business consisted of the unit that was to be sublet or occupied, meaning that ownership and possession of that unit needed to be transferred to the purchaser. That had been effected by the creation of the sublease. The transfer had been effected in that way purely to satisfy the landlord’s requirements. A transferor should not be denied the ability to treat the transfer as a “non-supply” simply because it was required to document that transfer in a particular way. The sublease did not restrain the purchaser from carrying on the business in any material respect and was an outright disposal: Rana v McCann [2003] NICh 4 applied. In substance, the assets that constituted the core of the lettings business were transferred, with the appellant retaining only a notional reversionary interest of three days but otherwise disposing of the economic activity that was to be carried on from, or in relation to, the unit.
Penny Hamilton (instructed by C&H Jefferson, of Belfast) appeared for the appellant; James Puzey (instructed by the legal department of HMRC) appeared for the respondents.
Sally Dobson, barrister