VAT and the transfer of a Going Concern

HMRC has released Revenue & Customs Brief 30/12 following the First Tier Tribunal decision in Robinson Family Limited [2012] UKFTT 360 (TC).

The case concerned a Transfer of a Going Concern (TOGC). A TOGC is where if certain conditions are met the sale of the assets of a business or part of a business when sold as a going concern are not considered a VAT-able supply. One of the conditions is that the assets are used in carrying on the same kind of business.

It becomes more confusing when property is involved, especially when it concerns a property development or property rental business. With property businesses, for there to be a TOGC the interest in the land being transferred must be the same as the interest by the transferor. If what was transferred was less than the transferor’s full interest in the land and as there was a retained interest, HMRC interpreted this as not meeting the conditions of a TOGC.

For example:

A freeholder granting a 999 year lease on a piece of land would be seen as the freeholder retaining an interest and therefore would not fulfil the condition for a TOGC to apply.

The Robinson Family Limited (RFL) case looked at HMRC’s interpretation of this law. The RFL operated as a property developer that purchased a 125 year interest in a site from the Belfast Harbour Commissioners. RFL intended to create six units from this site and to grant sub-leases. Due to restrictions imposed by the Belfast Harbour Commission, for one of the units being sub-leased RFL created an interest of 125 years less three days. As interpreted by HMRC this could not be treated as a TOGC, its guidance in VAT Notice 700/9 paragraph 6.3, bullet point two, states:

‘If you own the freehold of a property and grant a lease, even a 999 year lease, you are not transferring a business as a going concern. You are creating a new asset (the lease) and selling it while retaining your original asset (the freehold). This is true regardless of the length of the lease.  Similarly, if you own a head-lease and grant a sub-lease you are not transferring your business as a going concern.’

The Tribunal rejected HMRC’s argument, referring to the fact that distant three days reversion and the small economic benefit retained did not alter the substance of the transaction, which is to put the transferee business in the same position as RFL’s business.

HMRC has now revised its interpretation in light of this decision and has decided not to appeal. It accepts a small reversionary interest does not change the nature of the transaction. Small meaning small enough not to disturb the substance of the transaction and the value of the interest retained is no more than 1% of the value of the property immediately before the transfer. This should be applied on a property by property basis where a number of properties are being transferred.

HMRC is encouraging retrospective claims; if you believe that you have overpaid VAT – due to HMRC’s misinterpretation of the law and the RFL case – a claim can be filed with HMRC subject to the usual time limits. For details please view VAT Notice 700/45.

This also raises an issue around stamp duty, which is paid on the VAT inclusive amount. HMRC is currently considering this point and will issue guidance on whether a retrospective claim for overpaid stamp duty can be administered and paid back in cases of overpayment.