HMRC policy changes on the Transfer Of a Business as a Going Concern (“TOGC”)
With HMRC’s recent announcement of changes to its policy on the Transfer of a Business as a Going Concern (“TOGC”) property companies should review the VAT status of their transactions. In some cases repayments may be due.
Surrender of a property lease
Where the assets of a business are transferred as a TOGC, there is no supply for VAT purposes. Certain conditions must be met for TOGC treatment to apply, a key one being that the buyer must use the assets in carrying on the same kind of business as the seller.
In the case of the sale of a business which includes property, where the seller is a tenant, HMRC has long accepted that where the lease of the building was assigned to the buyer, and all the other conditions were met, then TOGC treatment could apply, because the buyer simply becomes the new tenant.
However, where the lease was surrendered to the landlord, and a new lease was granted by them to the buyer, HMRC took the view that TOGC treatment could not apply because the landlord was not using the same asset in carrying on the business which is being transferred.
This policy is now changing. New guidance is due to be published shortly, but HMRC now accept that this blanket policy is incorrect and that in certain cases a TOGC could apply. They give the example of a retailer selling its business to its landlord, or a tenant subletting premises by way of a business surrendering its interest to its landlord with the benefit of the subtenant.
Although the change in policy is immediate, HMRC have said that provided both transferor and transferee agree, they are content for their previous policy to be applied for a period of 4 weeks from 9 July.
The change of policy means that VAT may previously have been charged, or input tax not claimed, and additional SDLT payable on transactions which HMRC would now regard as qualifying as a TOGC. HMRC will accept adjustments applying the new policy to previous transactions subject to the usual time limits.
New dwellings and relevant residential and relevant charitable buildings
The first grant of a major interest by the person constructing such buildings is zero-rated. HMRC has traditionally taken the view that “person constructing” status does not apply to a person acquiring a completed building which has been transferred to them as a TOGC.
HMRC have now changed their policy and accept that when a building is transferred by way of a TOGC, the person acquiring it inherits “person constructing” status and is capable of making a zero-rated first grant of a major interest in such a building.
This is, of course, provided that the transferor has not already made such a grant, and HMRC will for this purpose ignore the grant giving rise to the TOGC.
It is also, apparently, subject to a provision that the person acquiring the building would be subject to an unfair VAT disadvantage if their first major interest grant would be exempt, such as Capital Goods Scheme adjustments to VAT recovered by the original owner.
Again, HMRC will allow this policy change to be applied retrospectively, subject to the usual time limit of 4 years.
Clarification of Revenue & Customs Brief 30/12
Lastly, HMRC has clarified that the change of policy allowing the grant of a lease to be regarded as a TOGC in certain cases applies generally. The original Brief only referred to property rental businesses, but HMRC accept that it can apply, for example, where a retailer sells their retail business and disposes of the premises by granting a lease.
The same Brief said that TOGC treatment could apply where the value of the interest retained, e.g. a reversionary interest did not exceed 1% of the value of the property immediately before the transfer (ignoring any mortgage or charge).
HMRC have confirmed that where only part of a property is transferred, e.g. a lease is only over one floor, then the calculation is only in respect of that part.
These are welcome and sensible changes of policy by HMRC.
If you think you may be affected by these changes please contact our VAT Partner, Phil Salmon.