Parties to asset sales that took place in the last four years who had to pay VAT because TOGC treatment was denied (for example, because a surrender of a lease was involved) may now be entitled to claim a refund of VAT and, possibly, stamp duty land tax.
Background and previous approach
A transfer of business assets is not regarded as a supply for VAT purposes where the conditions for transfer of going concern (TOGC) treatment are met. TOGC treatment is favorable not just in terms of cash-flow but because, where the transfer includes an interest in land, the stamp duty land tax (SDLT) charge is reduced (SDLT is chargeable on the VAT inclusive price).
In the past, TOGC treatment did not apply in cases where, on a transfer of business which included trading premises, the seller's interest in those premises was not assigned to the buyer, but, for example:
- the seller granted a lease to the buyer, or
- in the case of an existing lease, surrendered the lease to the landlord.
The UK tax authorities (HMRC) took the view that a person must transfer the actual property interest held in order for TOGC treatment to apply, i.e., the buyer must continue to operate the business with the benefit of the same property interest.
HMRC have changed their policy following a recent court decision. They now accept that TOGC treatment can apply where a disposal has taken place in substance, for example, by the seller granting a new interest in the form of a lease to the buyer, or where the seller surrenders an existing lease. The conditions are that:
the new grant or surrender must either be subject to the benefit of existing tenancies or be of premises where a transferred business has otherwise been carried out (e.g., sale of retail business to landlord); and in the case of a new grant, the value of the reversionary interest retained by the grantor must be less than 1 percent of the part granted.
A Ltd owns the freehold of a four-storey building valued at GBP4 million, which A Ltd rents out commercially. The freehold in each floor is worth GBP1 million. A Ltd sells its property rental business with respect to one of the floors by granting to B Ltd a 999 year lease of that floor, under which A Ltd is entitled to receive a ground rent of GBP100 each year. The value of that right, together with any and all other rights retained by A Ltd in that floor, is GBP2,000.
A Ltd has retained 0.2 percent of the value of its interest in the floor granted, and 75.2 percent of the value of its interest in the building as a whole. Considered in relation to the one floor alone, this is less than 1 percent, so provided all the conditions are satisfied, the transaction will be a TOGC, because HMRC will regard the 0.2 percent interest retained as too small to disturb the substance of the transaction.
If a business has paid VAT on a transaction which would be a TOGC under the new policy, it might be entitled to claim a refund. It will need to demonstrate that the TOGC conditions (as they apply under the new policy) were met and that the buyer would have been able to give notice that the option to tax would not be disapplied. The time limit for making refund claims is four years, so claims could be possible for transactions which occurred in the four-year period before the date of the announcement of the new policy (9 July 2014).
SDLT applies to acquisitions of interests in UK land, and is payable on the consideration paid plus VAT where applicable (e.g., where the option to tax has been exercised). If a refund is due of VAT in respect of past transactions on which SDLT has also been paid, the proportion of SDLT which applied to the VAT element might also be refundable.
New residential and charitable buildings
HMRC have also confirmed a helpful relaxation of the rules concerning the zero-rated first grant by the "person constructing" a major interest in residential (and charitable) property developments. The benefit of zero-rating for the first grant will now accrue to a TOGC buyer of the property (previously, HMRC did not accept that "person constructing" status accrued to a person who acquired a completed building which was transferred as a going concern).