The Upper Tribunal (UT) has dismissed HMRC's appeal against the first tier tribunal (FTT)'s decision in HMRC v Royal College of Paediatrics and Child Healthcare & Coleridge (Theobalds Road) Limited and another [2015] UKUT 0038 (TCC) on the basis that HMRC was out of time to raise the assessment. However, on the substantive issue, the UT has agreed with HMRC, holding that transfer of a business as a going concern (TOGC) treatment should be denied on a sale of land in circumstances where (i) the tenant was introduced to the seller by the buyer and (ii) the lease forms part of the sale arrangements.

In 2007, the Royal College of Paediatrics and Child Health (RCPCH) sought to acquire a property from Coleridge, a property development company, in the most VAT-efficient manner. The tenants of RCPCH's existing property had indicated that they would move with RCPCH to the new property. Therefore it was decided that, prior to the transaction, the tenants would enter into agreements with Coleridge to lease parts of the building, so that when the property was sold to RCPCH, a rental business could be said to be in existence.

One of the conditions for TOGC treatment is that the buyer must intend to use the transferred assets in carrying on the same kind of business as was carried on by the seller. According to HMRC guidance and case law, it is possible for the sale of freehold land subject to an agreement for lease to be treated as a TOGC even if no rent is being paid at the time of the sale. The FTT therefore held that the transaction was a TOGC.

However, on appeal by HMRC the UT disagreed with the FTT and distinguished a genuine transfer of leased premises (even if the lease has yet to be completed or rent paid) and arrangement effected as part of a sale to minimise VAT. The UT stressed that when deciding whether a part of a business has been transferred, consideration must be given to all of the circumstances which could include the intention of the parties. The lease agreement in this case arose directly from, and was simply part of, the sale arrangements and was not part of Coleridge's business.

The key distinction when considering TOGC treatment is whether the seller has a genuine, independent arrangement with the tenant or whether the tenant is introduced to the seller by the buyer. Taxpayers should be mindful of this distinction as TOGC treatment is likely only to apply if the tenant is found by the seller, not the buyer.