On 9 July 2014, HMRC published Revenue & Customs Brief 27/14, clarifying a number of changes in HMRC’s approach where there is a TOGC.
When the assets of a business (or part of a business) are transferred in a TOGC, no supply of those assets takes place for VAT purposes. To qualify for this treatment a transfer must satisfy certain conditions, including the condition that the buyer must intend to use the assets to carry on the same kind of business as the seller.
Historically, HMRC had interpreted the law as meaning that for a transfer of a property rental or property development business to qualify as a TOGC, the interest in land being transferred had to be the same interest as that used by the transferor in his business. This meant that if what was transferred was less than the transferor’s full interest in the land, the retained interest would prevent a TOGC.
This interpretation was rejected by the First-tier Tribunal (Tax Chamber) (FTT) in the case of Robinson Family Limited3, where a small reversionary interest was held not to prevent the transaction being a TOGC. In Revenue & Customs Brief 30/12, HMRC made clear that it would not appeal that decision, and said that it would review its policy regarding surrenders of leases.
HMRC has (as announced in the recent Brief) now concluded that review, and consider that there is in principle no obstacle to the surrender of a lease being a TOGC, subject to all the normal conditions being satisfied. HMRC has also concluded that the change of policy
confirmed in Revenue & Customs Brief 30/12, applies generally, and is not confined to property letting businesses.
Revenue & Customs Brief 30/12, also outlined the “1% “ test. This provided that HMRC will accept, where the value of a retained interest is “no more than 1 per cent of the value of the property immediately before the transfer (disregarding any mortgage or charge)”, that this reversion is sufficiently small for TOGC treatment to be capable of applying. HMRC has now clarified that where the lease concerned is for part of a building only, the 1% calculation should be based on the relevant part of the building only.
New guidelines are also provided regarding TOGCs on new developments in residential or relevant charitable dwellings.
To read the FTT’s decision in Robinson Family Limited click here
To read Revenue & Customs Brief 30/12 click here
To read Revenue & Customs Brief 27/14 click here