On 28 January 2015, the Upper Tribunal (in HMRC v Royal College of Pediatrics and Coleridge) agreed with HMRC that a sale of property subject to an agreement for lease did not qualify as a transfer of a going concern (TOGC) for VAT purposes as the arrangements, rather than amounting to a genuine transfer of leased property, were put in place to minimise the VAT payable.

Coleridge had sold the freehold property to Royal College. As Royal College was a charity, largely carrying out exempt activity for VAT purposes, it was concerned not to suffer any irrecoverable VAT on the purchase. It was therefore agreed between the parties that Royal College’s existing tenants would, prior to the sale, enter into an agreement for lease with Coleridge in respect of the property to be sold to Royal College.

On the substantive issue before it, the Tribunal agreed with HMRC that the sale was not a TOGC. Adopting a “substance over form” test, looking at the parties’ intentions, it held that on the facts there was no transfer of a pre-existing business as:

  • the prospective tenant was introduced by the purchaser of land, resulting from an existing relationship with the purchaser only
  • the sale of the freehold and agreement for lease were part of the same arrangement.

On HMRC’s published guidance, which states that a TOGC can take the form of a property sale with the “benefit of a contractual agreement for a lease but before the lease has been signed”, the Tribunal held that the guidance did not apply to situations such as those created by the parties on this case. The guidance is general in nature and reflects HMRC’s position in “ordinary” cases.

The decision can be viewed here