HMRC has changed its policy on whether a surrender of a property lease can be treated as a VAT-free transfer of a going concern (TOGC).
Subject to certain conditions, a TOGC occurs when assets that form part of a business are transferred as a going concern.
One of the main conditions is that the buyer uses any assets in a purchase of the same kind of business.
The situation for a surrender of a lease can occur when:
- an occupier sells a business including the trading premises;
- a landlord sells a property subject to tenancies;
- in some cases where a developer sells a development that is currently in progress.
HMRC has always accepted that an assignment situation, where a seller is a tenant and assigns the lease to the buyer who becomes the new tenant, will qualify as a TOGC subject to the other conditions.
The point of dispute was when a tenant surrenders a lease and the buyer is a landlord; the lease will normally ‘merge’ with the landlord’s interest in the land and in essence cease to exist. HMRC has never agreed that this situation could be a TOGC as the same asset is not used in the business.
The Robinson decision held that the grant of a lease could be a TOGC and, to decide, ‘one must look to the substance of the transaction rather than its form’.
HMRC accepted that the granting of a lease could be a TOGC and publicly stated this in Revenue & Customs Brief 30/12, in regard to surrendering a lease.
HMRC has been reviewing its position, hence the release of Revenue & Customs Brief 27 (2014)
HMRC has now accepted, subject to the normal conditions, that surrendering a lease could be a TOGC. For example:
- ‘Where a tenant subletting premises for its business decides to surrender its interest in the property together with the sublet tenant, subject to the other conditions this could be a TOGC.’
- ‘A retailer sells its retailing business to its landlord, again subject to the other conditions this could be a TOGC.’
The problems arise retrospectively: for VAT where output tax was charged on a sale which would now be seen as a TOGC or input was restricted as the surrender was seen as an exempt supply; and for Stamp Duty Land Tax (SDLT), which is always charged on the VAT inclusive.
Provided that certain legal requirements are met and the normal time limits are adhered to, there is a possibility to claim back overpaid output tax or under-claimed input. For details on how to claim, please refer to VAT Notice 700/45: How to correct VAT errors and make adjustments or claims
The time limit for claiming any overpaid SDLT is four years from the date of the transaction, and any claim must be made under Schedule 10, paragraph 34, Finance Act 2003. Further details can be found in HMRC’s manuals:
HMRC will not refund SDLT unless the overpaid VAT has also been refunded.