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TaxationWeb by VAT Solutions (UK) Limited

VAT Solutions (UK) Ltd explain the implications and requirements for a business to obtain transfer of going concern status on a property transaction.Obtaining transfer of a going concern (TOGC) status on property transactions can provide a valuable cashflow saving for businesses purchasing business assets, but getting it wrong and charging VAT on a transaction that qualifies as a TOGC can lead to the purchaser having its input tax disallowed by HM Customs & Excise and having to claim the VAT back from the vendor. A TOGC is treated as neither a supply of goods or services for VAT purposes (Article 5, SI 1995/1268).

If you can obtain TOGC status on a property sale then no VAT need be charged. This has an immediate cashflow advantage for the purchaser as he does not have to finance the VAT for up to three months.

Property rental businesses buy and sell properties frequently, but even amongst this sector, as well as their adviser, misunderstandings and uncertainty are common. In addition to this it is increasing common for business to sell their trading premises and rent back part of it from the purchaser in order to free up much needed cash. If the seller has opted to tax the property it is commonly thought that VAT has to be charged in these circumstances but this need not be the case.

Qualifying as a TOGC

To qualify as a TOGC, in addition to the normal requirements, in the case of a property sale the purchaser must have opted to tax the property and notified HM Customs & Excise from the date of the transfer, be registered for VAT and there must be a property rental business in existence. This is commonly thought to mean that the whole property must be sold with existing tenants or that it must be at least partly tenanted.

This need not be the case, following a number of VAT Tribunal decision HM Customs & Excise now accept that a property rental business exists in all of the following circumstance and has confirmed this by publishing them in VAT Notice 700/9/02 paras 2.5, 4.3, 7.1-7.3 and Business Brief 26/98.

Examples

These are examples of where a property transfer will count as a TOGC, so if you:

• own the freehold of a property which you let to a tenant and sell the freehold with the benefit of the existing lease, a business of property rental is transferred to the purchaser. This is a business transferred as a going concern even if the property is only partly tenanted. Similarly, if you own the lease of a property (which is subject to a sub-lease) and you assign your lease with the benefit of the sub-lease, this is a business transferred as a going concern;

• own a building which is being let out where there is an initial rent free period, even if the building is sold during the rent free period, you are carrying on a business of property rental;

• granted a lease in respect of a building but the tenants are not yet in occupation, you are carrying on a property rental business;

• own a property and have found a tenant but not actually entered into a lease agreement when you transfer the property to a third party (with the benefit of the prospective tenancy but before a lease has been signed), there is sufficient evidence of intended economic activity for there to be a property rental business capable of being transferred; and

• are a property developer selling a site as a package (to a single buyer) which is a mixture of let and unlet, finished or unfinished properties, and the sale of the site would otherwise have been standard rated, then subject to the purchaser electing to waive exemption for the whole site, the whole site can be regarded as a business transferred as a going concern.

If you a buying a building and the purchase falls into any one of the above categories it will be a TOGC and no VAT should be charged. Make sure the vendor is aware of this and treats the transaction correctly and you can save the costs of financing the VAT charge for up to three months, which can be substantial.

Trading Premises

Not just property rental businesses buy and sell commercial properties, it is quite common for business to sell their trading premises as part of a TOGC of their business. If the vendor has exercised the option to tax then in order to obtain TOGC status on the property, as well as the other assets, the purchaser has to opt to tax the property and notify HM Customs & Excise on or before the date of the transfer. This is often overlooked by the vendor and it can land them with an assessment from HM Customs & Excise.

Tenanted Commercial Property

In addition the above requirements the recent Budget has seen HM Customs & Excise amend paragraph 2 of Schedule 10 of the VAT Act 1994.

This amendment imposes a new condition for obtaining TOGC status when selling a tenanted commercial property on which the option to tax has been exercised.

It is quite simple to fulfil and is designed as an anti-avoidance measure that will effect few businesses, however, if you forget to do it you may lose your TOGC status and receive an assessment from HM Customs & Excise for underdeclared VAT.

No Effect

An option to tax does not have any effect (is ‘disapplied’) where the purchaser intends to use the property in a specified number of ways. The most common of these are:

• use as a dwelling or number of dwellings;
• use for a charitable purpose, other than as an office;
• use by a housing association; or
• use by connected parties other than for mainly ‘eligible purposes’ (anti-avoidance).

The new condition only applies to property transactions in excess of £250,000 and requires the purchaser to notify the vendor that he will not have his option to tax disapplied. This notification must be made before completion of the transaction.

If you are selling a property and want TOGC status you must ensure you have a letter from the purchaser confirming that his option to tax will not be disapplied. If you don’t get one, you will have to charge VAT. This measure is operative from 18 March 2004.

This requirement to notify the vendor is not particularly onerous and it is likely that the majority of transactions that qualified for TOGC treatment before the Budget will still qualify providing the purchasers is able to give this notification. However, VAT will be charged on the sale if the purchasers fail to provide the notification and the parties concerned will suffer the adverse cash-flow consequences, increased Stamp Duty Land Tax (SDLT) and, possibly, penalties for getting it wrong.


VAT Solutions (UK) Ltd
11 Winmarleigh Street,
Warrington,
WA1 1NB

(T) 01925 242497
(F) 01925 242498
(M) 07810 433927
(W) www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc