Solicitors who deal regularly with the acquisition and disposal of unincorporated businesses will be familiar with the regulations governing transfers of going concerns (TOGC). Many others concerned with property, however — although now familiar with the VAT aspects of property transactions as a result of the Finance Act 1989 — may not yet be aware that such regulations can now apply to what were previously “mere” property transactions.
A TOGC occurs when the whole of the business is disposed of so as to put the new owner in possession of a business which can be operated as a business from day one: the only real change is that of ownership. It can include disposals of part of a business or of capital assets — including property, provided that the assets transferred constitute the “business” and are capable of continuing as such without the addition of any further (or new) assets.
The benefit of such transactions being treated as TOGCs is that they are not treated as taxable supplies for VAT purposes, and VAT should not, therefore, be charged by the vendor. This can obviously give a considerable cash-flow benefit to the purchaser, who would otherwise have to wait until the next accounting day (potentially up to three months away) to reclaim the VAT from HM Customs & Excise (Customs), and while this can be mitigated by linking payment to the parties’ VAT accounting days, it may be inconvenient and complicated to do so.
The basic criteria for the disposition to be treated as a TOGC and therefore a non-supply are:
(a) the assets transferred must be used by the transferee in carrying on the same kind of business as that carried on by the transferor; and
(b) where the transferor is a taxable person
(i) the transferee is already a taxable person, or
(ii) immediately becomes a taxable person as a result of the transfer.
However, the other criteria laid down in Customs VAT Leaflet 700/9/87 will also apply.
So far as this concerns purely property transactions Customs seem prepared to treat income-producing properties as rental income businesses. Essentially this means investment properties with rent-paying occupational tenants.
However, where the disposal of a business as a TOGC includes a property which is not let and, for example, occupied in the course of the business (eg the sale of a newsagent’s) and the property is standard rated then there should be no reason why such property should not also be treated in the same way.
In practice, purchasers of such investment properties will be keen to ensure that a purchase is treated as a TOGC because of the cash-flow benefit, which can be substantial in large transactions. It should, however, be a purchaser’s primary concern to ensure that any such transactions are treated as TOGCs and that no VAT is paid.
If the transaction is truly a TOGC the purchaser will not be entitled to claim back or receive a credit from Customs for the input tax paid over to the vendor as he would normally under sections 14 and 15 of the Value Added Tax Act 1983 because the TOGC is not a taxable supply. In addition, while the vendor should be entitled to a refund from Customs there may be difficulties (see Customs & Excise Commissioners v Fine Arts Development [9] AC 914 — although the difficulties experienced by the taxpayer there should now have been rectified by the Finance Act 1989). The purchaser will need to incorporate provisions to ensure recovery and repayment to it by the vendor in such event.
The simpler alternative (although in practice it may not be so simple — see below) would be for the purchaser to establish at the outset of the transaction whether the transaction is a TOGC and should confirm with the vendor that it will not seek to charge VAT.
Any contract will therefore also need to include provisions to cover the question of TOGCs. In particular, the following should be included from both the vendor’s and purchaser’s points of view:
(i) the sale should be expressed as a TOGC and it be intended that article 12(1) of the VAT (Special Provisions) Order 1981 (SI 1981 No 1741) apply;
(ii) there should be an obligation on both parties to ensure that a TOGC is effected in accordance with the above-mentioned criteria and the transfer is not treated as either a supply of goods or services so that no VAT is payable;
(iii) the purchaser will be under an obligation to elect to standard rate the property;
(iv) the purchaser should warrant that the property is to be used in carrying out the same kind of business as the vendor;
(v) the vendor will have to undertake to hand over on demand all records referred to in section 33(1) VAT Act 1983 and para 7, Schedule 7 VAT Act 1983. The purchaser should preserve such records for at least 10 years;
(vi) if Customs determine that VAT is payable then the purchaser should be liable to pay over this amount together with any penalty or interest charge that has arisen owing to a failure by the purchaser to observe the provisions regarding VAT in the contract.
Bearing in mind that VAT should not be charged on TOGCs it is perhaps surprising that Customs have not given any guidance on the point in their VAT leaflets 742 and 742b. There is currently only one VAT leaflet (700/9/87) dealing with TOGCs, which, as it was issued prior to the Finance Act 1989, does not deal directly with properties as “rental income businesses” (however, it is believed that Customs are in the process of issuing an updated version).
Those in doubt as to whether a particular transaction is a TOGC may consider writing to Customs at Kings Beam House for an informal “ruling” on the matter. However, there is no obligation on Customs to respond within a specified time and a delay in obtaining this may create difficulties for transactions which need to be completed speedily. In practice, if this is to be done one should speak to the local office of Customs (the local office for the property) and establish how long they would take to provide such a ruling.
There is, therefore, what one might describe as a “Catch 22” situation. If a transaction is truly a TOGC then no VAT should be paid, but if VAT should have been paid then the vendor may have difficulty in obtaining the money from the purchaser (or, worse, may have the sale price deemed inclusive of VAT) and may suffer penalties and interest charges for late payment. If VAT is paid and Customs later decide that the transaction is a TOGC and VAT should not have been paid then the purchaser will not be entitled to a refund or credit and would have to recover the money from the vendor who, in turn, may have paid it over to Customs and may then have difficulty in recovering it from Customs.
The final “twist” is the fact that Customs are under no statutory obligation to provide any ruling and, as the Inland Revenue sometimes do on clearance applications, any ruling they do give may be qualified to the effect that Customs will not be bound by it.
In conclusion it would appear that the importance of TOGC’s in relation to certain property transactions has not been fully realised by many property lawyers. This is especially true for purchasers, nnot only because of the cash-flow benefit but more important because of the possible difficulties which might be encountered in recovering incorrectly charged VAT. Given the potential difficulties which practitioners face in adequately advising clients it is hoped that Customs will now issue some further guidance on the subject.
Peter D Sugden is a Solicitor in the commercial property department of Forsyte Kerman . Hardish Tamana-Sugden is a solicitor and corporate tax specialist.
