The issues here relate primarily to Anti-Avoidance Rules; especially with specific regard to land and property transactions that fall under the category of a Transfer of a Business as a Going Concern (TOGC). The implications of any decisions made can carry forward for 20 years and the choice of whether to pay tax and VAT remains in the hands of the supplier. (He needs to make a formal notification of his decision to the HMRC). Any person involved in dealing with property has to be acutely aware of TOGC regulations.
Meer and Co has the necessary experience to be able to guide you through the maze.
Overview of VAT Liability
The VAT liability depends on the nature and the type of building being sold. If it is a new commercial building or one on which an option to tax has been made, the sale proceeds will be standard rated. If not, then the disposal will be exempt. However, if the property is sold as, or part of, the transfer of a business as a going concern (TOGC), then the supply of the building will be outside the scope of VAT.
Introduction to TOGC rules
TOGC are not considered to be a supply and; as such, are not bound by VAT requirements. Property transfers rules are primarily applicable to Occupiers who are disposing of a business which includes the actual property from where the business is located and Investors who are disposing of a property which was rented for letting.
The sale of a new commercial property and the sale or letting of all commercial property on which the option to tax has been exercised, is subject to VAT at the standard rate and HMRC can allow for VAT relief. Although the rules relieve the purchaser of a business from paying VAT, the regulations were in fact one of the first Anti-Avoidance measures.
VAT legislation provides that the supply of the assets of a business to another person in the form of a TOGC is considered neither as a supply of goods NOR as a supply of services.
Specifically, if the supply of a TOGC involves the WHOLE assets that are used by the new owner to conduct the same type of business as that of the original owner, (regardless of if it is a constituent part of any existing business) and also if, the original owner is a taxable person then the one to whom the transfer is made to also becomes a taxable person.
Secondly, in the case of PART OF the business being a TOGC, it is essential that the transferred business part be capable of operating independently. Also that these transferred assets be used by the new owner in a similar manner to the original type of business, even if as part of an existing business similar to that of the original owner in relation to that part; and finally, if the person who transfers the assets is a taxable person, then new owner becomes (as a result of the transfer), also a taxable person.
TOGC and property rules
Where the TOGC includes commercial property then there are TWO further conditions. These are firstly the Need for Purchaser to Opt and secondly, a Notification by the Purchaser, (which is referred to as non-disapplication).
These conditions apply where a vendor has opted to tax the land, or building, or new or incomplete buildings or works have been transferred (these are normally mandatory standard rated).
Need for purchaser to opt
This states TOGC concession is not available until the purchaser has exercised the option to tax in respect of the land and buildings, and notified their option in writing to HMRC no later than the relevant date. Thus the seller will have to charge and is responsible for accounting for VAT on the transfer of the property.
Notification by purchaser – Non-Disapplication
The second condition is an Anti-Avoidance measure which specifies that the new owner must notify the original owner that their option will not be dis-applied under the anti-avoidance rules. Disapplication broadly means that the new owners will not be letting the property concerned to any exempt or partly exempt occupiers who, are either connected to them; provided funding for the acquisition; or are connected to persons who provided funding. In most cases the purchasers will be able to provide the required notification. The notification can be in any form, e.g. a side letter, specific clause in the agreement or by a warranty clause. If purchasers do not provide the notification VAT will be chargeable by the seller regardless of whether there is any avoidance motive.
It should be noted that the option by the purchaser must actually be notified to HMRC, not simply made before the relevant date if TOGC exemptions are to apply. The relevant date is the earliest date in which a supply in connection with the transfer of the building is made. The earliest date is normally the earlier of the date of completion or payment (if a deposit is paid to the vendor’s agent, but not to anyone acting as stakeholder).
HMRC’s views on applicability of TOGC treatment are the following, (assuming that the conditions concerning registration and notification of the option to tax are met).
- Sales (even with partly tenanted property) with the benefit of existing leases can be a TOGC
- The sale occurs during a rent free period
- Tenants are not yet in occupation
- Tenant has been found and the sale has benefit of the respective tenancy but the lease not yet signed
- A developer’s site consisting of let and unlet, finished or unfinished properties if it is to a single buyer.
There is no TOGC:
- If the tenant cannot remain after the sale OR the owner is still looking for a tenant
- The transaction is a grant of a lease
- The current tenant’s lease is surrendered immediately before the sale even if sub-tenants remain; or
- the sale is to the sole tenant.
Since TOGCs are not considered to be a supply then NO VAT can be charged. This implies that the new owner will not have to fund the VAT payment in advance of recovering the VAT from HMRC. There is a Stamp Duty Land Tax saving because (if a sale is subject to VAT, Stamp Duty Land Tax is payable on the whole consideration including the VAT element), however since there is NO VAT charged, the Stamp Duty Land Tax will be correspondingly less.
Recovery of VAT on costs of TOGC transactions
There have been problems with the recovery of VAT on professional fees bearing in mind that a TOGC is not a supply for VAT purposes. HMRC has attempted to deny recovery of VAT to original owners prior to transfer.
A European Court of Justice decision held that provided the lettings from a property were ‘a clearly defined part’ of its activities then the VAT on costs could be recovered if the property lettings were taxable, i.e. opted property. HMRC accept that VAT related to a disposal of property can be treated as an overhead of the business (or part of the business) that is transferred. If the business or part makes only taxable supplies the VAT is recoverable in full; if it makes only exempt supplies, none of the VAT can be recovered. A business or part making both taxable and exempt supplies can recover VAT in accordance with its partial exemption method.
A Capital Goods Scheme Issue
One of the consequences of a TOGC is that if the building is within the Capital Goods Scheme the new owner has an obligation to take on the old owner’s Capital Goods Scheme adjustments. The adjustments are based on the original input tax recovery by the previous owner who will have to provide the new owner with sufficient information so as to allow them to make the adjustments.
The TOGC provisions are beneficial and have a positive effect on cash flow and produce a real Stamp Duty Land Tax saving. However applying the rules incorrectly can be costly. If a original owner does not charge VAT but the transaction are later found not to be a TOGC, then the vendor will have to pay the VAT not charged to HMRC. If VAT is charged but the transaction is found to be a TOGC, the purchaser will be unable to claim the VAT charged as input tax. Transactions should all be looked at critically, protective clauses inserted in contracts and each transaction treated on its merits.
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Article written by Haroon Rafique (Principal, Meer & Co Chartered Accountants and Tax Consultants)
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