HMRC said that a recent decision by the Tax Tribunal on when the transfer of assets between two different parties could be considered as being a 'transfer of a going concern' (TOGC) for VAT purposes had shown that the transferor of land could retain a small interest in that property without the new owners incurring a VAT charge on the deal.
A sale of assets constitutes a TOGC where there has been a sale of assets which together are capable of being run as a business to someone who intends to use those assets for carrying on the same type of business. A TOGC is outside the scope of VAT. The sale of a let property can constitute the sale of a property rental business and can therefore qualify for TOGC treatment.
Previously, HMRC’s view was that a TOGC of a property rental business required the transfer of the whole of the seller’s interest in the transferred property- so their guidance stated that the grant of a 999 year lease to the buyer subject to tenancies out of a freehold would not be a TOGC, although the seller had transferred virtually all its economic interest in the property rental business.
In a dispute with a property development company, Robinson Family Limited (RFL), heard by the Tax Tribunal, HMRC had argued argument that RFL could not have transferred all or part of its property rental business as a going concern, because it did not assign the full term of its lease to the buyer. Instead, RFL granted to the buyer a new lease, 3 days shorter than its 125 year lease of the property, as it was not permitted by the terms of its headlease, to assign only part of that lease.
The First Tier Tax Tribunal said that that HMRC's approach was wrong. It found that, although RFL retained the headlease, its interest in a three day reversion and the small economic interest which it represented in no way altered the substance of the transaction. The substance of the transaction was to put the transferee business in a position where it was able to continue the previous lettings business of RFL.
"HMRC accepts that the fact that the transferor of a property rental business retains a small reversionary interest in the property transferred does not prevent the transaction from being treated as a TOGC for VAT purposes," HMRC said in a briefing note. "Provided the interest retained is small enough not to disturb the substance of the transaction, the transaction will be a TOGC if the usual conditions are satisfied."
"In this context, the Tribunal's decision does not as such alter any other areas of HMRC's policy on TOGCs, but we are reviewing the policy on whether the surrender of an interest in land can sometimes result in a TOGC. HMRC is also reviewing whether properties which are used in a business other than property letting are affected by this change of policy," it said.
"HMRC will accept that a reversion retained by the transferor is sufficiently small for TOGC treatment to be capable of applying if the value of the interest retained is no more than 1 per cent of the value of the property immediately before the transfer (disregarding any mortgage or charge). Where more than one property is transferred at one time, this test should be applied on a property by property basis rather than for the entire portfolio. If the interest retained by the transferor represents more than 1 per cent of the value of the property, HMRC will regard that as strongly indicative that the transaction is too complex to be a TOGC," HMRC added.
"HMRC’s view that TOGC treatment may not apply where the value of the interest retained by the seller is more than 1% of the property is over–restrictive and investors should review the position where the reversionary interest is above this level," said property tax expert John Christian of Pinsent Masons, the law firm behind Out-Law.com.
When an interest in property is transferred the stamp duty land tax (SDLT) payable is calculated on the consideration paid plus any VAT levied on that consideration. This means that if VAT was paid on past transactions as a result of HMRC's previous policy, more SDLT may have been paid than should have been.
HMRC said it was reviewing "whether an adjustment can be made to the SDLT already paid" and would "soon" provide guidance on the issue.
"HMRC’s announcement was expected but it is surprising that the announcement does not deal with the important issue of SDLT reclaims on transactions which should have been given TOGC treatment," said John Christian. "Investors should review their acquisitions over recent years to see if any acquisitions should have qualified as a TOGC and consider making SDLT reclaims."
One of the requirements for a transfer of a property to be a TOGC is that the buyer must notify the seller that it has opted to tax the property, notified that option to HMRC and stated that article 5(2B) of the VAT (Special Provisions) Order 1995 does not apply to it. If the parties assumed that TOGC treatment would not be available because of HMRC's previous published practice, they would not have given the article 5(2B) notification in respect of past transactions.
HMRC now state that provided the parties can satisfactorily evidence that article 5(2B) did not apply at the time of the transaction and thus the requisite notification could have been given, they will accept that the legal requirement has been complied with.