Where a business is transferred as a going concern (TOGC), the transaction falls outside the scope of and will not be subject to VAT. This applies to the sale of tenanted properties as well, if certain conditions are met. For example, the sale of a freehold interest in land subject to, and with the benefit of, a lease may qualify as the transfer of a property letting business – and the sale of a property subject to an agreement for lease may qualify as well.
The purchase price for the property at the centre of the dispute in Commissioners for HM Revenue and Customs v Royal College of Paediatrics and Child Health [2015] UKUT 38 (TCC); [2015] PLSCS 88 was £17.445m. As a result, any VAT due on the price would have been substantial.
The college is a registered charity whose activities are predominantly exempt from VAT. However, the college was registered for VAT. It occupied premises in London, which it shared with its tenants, two charitable organisations with aims related to those of the college, and, when the college decided to relocate to new premises, its tenants chose to move with it too. The premises that the college selected were being marketed to prospective tenants, but the college persuaded the owner to sell the property instead.
The college was advised that it could save VAT on the transaction (which it would have been unable to recover), if the transaction constituted a TOGC. Consequently, one of its tenants entered into an agreement for lease with the seller, which was conditional on the seller entering into an unconditional contract to sell its property to the college by a specified date. Later that day, the seller contracted to sell the property to the college with the benefit of the agreement for the lease. The sale agreement stated that the parties believed that the sale was a TOGC and, when the parties completed the transaction, no VAT was charged on the sale.
Did the transaction qualify as a TOGC? The Upper Tribunal decided that it did not. Where a seller sells a freehold, and nothing else, the transaction will not qualify. There must be a property letting business as well, which can truly be said to have been part of the seller’s business, and the test is one of substance not form.
The judge recognised that the seller had been intending to let the property, as opposed to selling it, and that the college had intended to – and did – let rooms in the property to the charitable organisations that moved with it. However, the critical feature of this case was the relationship between the college and its tenants.
The agreement for lease with the seller had not caused the charitable organisation that entered into it to become a tenant of the college in the property after the transfer. The agreement was not a part of the seller’s business; it arose directly from, and was part of, the sale transaction. Therefore, the seller had not transferred part of its business to the college and the transfer was not a TOGC. However, the tribunal disallowed the VAT assessment raised by HMRC for the simple reason that it was out of time.
Allyson Colby is a property law consultant
