HMRC now accepts that a transaction can be a transfer of a going concern (‘TOGC’) for VAT purposes even if a small reversionary interest is retained by the transferor of a property rental or property development business. This shift in HMRC’s viewpoint has been inspired by the recent decision of the Tax Tribunal in the case of Robinson Family Limited (‘RFL’).
HMRC’s previous stance (noted in para 6.3 of Notice 700/9 which should now be ignored) was that in order for there to be a TOGC the transferor had to transfer its full interest in the land and that the owner of a freehold granting a lease would not constitute a TOGC even if the lease was for 999 years.
In RFL a property development company had purchased a 125 year interest in a site. There was a restriction against any sub-division of the site other than by sub-lease and so RFL granted an interest of 125 years less three days to a purchaser. HMRC argued that RFL had not transferred all or part of its business as a going concern, because it did not assign the full term of its lease to the purchaser. The Tribunal instead held that although RFL retained the headlease, the minor interest in a three day reversion and the small economic interest which it represented did not alter the substance of the transaction. The transaction actually enabled the transferee business to continue the previous lettings business of RFL and so the transaction was treated as a TOGC.
HMRC has not restricted the impact of this case to purely similar facts and instead has said that if the usual conditions necessary for a TOGC are present and the reversion retained is no more than 1 per cent of the value of the property immediately before the transfer (ignoring any mortgage or charge) then the transaction can be a TOGC for VAT purposes. This means that the supply is outside the scope of VAT and therefore VAT is not chargeable. If more than one property is transferred simultaneously, the test should be applied on a property-by-property basis, rather than to the entire portfolio. If more than 1 per cent of the interest is retained HMRC will regard that as strongly indicative that the transaction is too complex to be a TOGC.
If due to HMRC’s altered position you need to claim TOGC treatment retrospectively and recover overpaid VAT, HMRC have said that the parties will need to show that article 5(2B) of the VAT (Special Provisions) Order 1995 did not apply at the time of the transaction and that the transferee could have given the relevant notification that an option to tax would not be rendered ineffective.
HMRC are currently considering whether an adjustment can be made to any SDLT already paid and will provide further guidance on this matter soon. This is likely to be the real contentious issue as this is where the greatest difference in value lies.