The Upper Tribunal has recently denied Transfer of a Going Concern (TOGC) treatment for the transfer of a property subject to an occupational agreement for lease. The decision highlights that the TOGC requirements must be viewed realistically and the substance of the “business” being transferred needs to be considered.
The Royal College of Paediatrics and Child Health (the College) wanted to purchase a building from a property development company (Coleridge). The property was opted to tax by Coleridge. The College wanted the transfer of the property to take effect as a TOGC because any VAT charged would have been largely irrecoverable in its hands. Although the property was being marketed to tenants at the time of the sale, Coleridge had not yet found a tenant.
The College leased another property to two other charities – and both these charities wished to move into the new building once acquired by the College.
Accordingly, the College introduced one of these current tenants to Coleridge, and the parties agreed that prior to the sale of the building that tenant would be granted an agreement for lease in relation to one room in the new building (at a premium of £1,000 – repayable if the sale to the College did not occur – and with rent only becoming due after the lease was completed by the College once the building had been purchased). The sale of the building completed, and was treated as a TOGC on the basis of the agreement for lease. Following completion, the College subsequently granted the lease (and another lease to the other charity tenant).
HMRC challenged the TOGC treatment. It argued that Coleridge did not really have a property rental business to transfer, because the tenant under the agreement for lease was introduced to it by the purchaser as part of the arrangements for the sale of the building. That tenant was connected with the College, in the sense that it wanted to continue its occupational arrangements with the College.
The Upper Tribunal agreed with HMRC (though in fact HMRC lost the case on procedural grounds, having brought its assessment out of time). On the substantive issue of TOGC treatment, the Upper Tribunal drew a distinction between (i) a seller with a genuine property rental business existing independent of the process for selling the property (where TOGC treatment is possible), and (ii) a scenario where the tenant is introduced to the seller by the buyer purely as part of the sale arrangements. In this case, the arrangements fell the wrong side of the line and TOGC treatment should not apply.
The case is a useful reminder that it is the substance of the property letting arrangements, and not merely their form, which is the primary determining factor involved in TOGC treatment. Structuring a sale by having a purchaser effectively create a property rental business for the seller will not usually be enough for TOGC treatment to apply. That business has to exist independently of the sale arrangements.