HMRC now accepts that the grant of a long lease subject to existing leases is capable of being a transfer of a going concern (TOGC) for VAT purposes, provided that the lessor’s retained interest is small enough not to disturb the substance of the transaction, being the transfer of the lessor’s property letting business to the lessee.  In practice the retained interest must have a value of no more than 1% of the value of the property immediately before the transfer in order to be regarded as small. An example would be the grant of a long lease, commercially equivalent to a freehold, at a nominal ground rent. This is a very welcome development and we hope it will be followed by similar TOGC extension to lease surrenders. 

It may now be possible to reclaim VAT and SDLT on VAT previously paid.


The sale of a new or VAT elected commercial building is subject to VAT unless it is taken outside the scope of VAT under the TOGC provisions.  The sale of a property letting business is capable of being a TOGC provided that the buyer makes and notifies HMRC of a VAT election and certain other conditions are satisfied.

HMRC interpreted the TOGC rules strictly and its published guidance stated that the grant of a new lease was not capable of being a TOGC, regardless of its length, even though the lessee took the property subject to existing tenancies. Even where the lessee acquired a property of equal value to the freehold and received the rents previously paid to the lessor, HMRC denied TOGC treatment as the lessor retained its freehold or superior leasehold interest.

In the recent case of Robinson Family Limited v HMRC [2012] UK FTT 360 (TC) the First Tier Tribunal (FTT) decided that HMRC’s approach was wrong.  In that case, the lessor held a 125 year head lease, the terms of which prohibited assignment. As assignment was not possible, the lessor granted the “buyer” a long sub-lease with a term only three days shorter than the lessor’s head lease. The FTT, focusing on the substance of the transaction rather than its legal form, decided that TOGC treatment was available in this case, as the transferee could carry on the same letting business as the transferor.

Change of practice (Revenue & Customs Brief 30/12)

HMRC have decided not to appeal against the FTT decision in the Robinson case and have published a Brief to explain the change in their position.  Rather than limiting TOGC treatment to cases such as Robinson in which the lessor is prohibited from assigning its existing interest, HMRC accept that TOGC treatment will be capable of applying generally in the case of long leases of pre-let property provided that the interest retained by the landlord is small enough not to disturb the substance of the transaction.  HMRC will accept that a reversion is sufficiently small for this purpose if the value of the interest is no more than 1% of the value of the property immediately before the transfer (disregarding any mortgage or charge).  If the retained interest represents more than 1% of this value, HMRC will regard that as “strongly indicative” that the transaction is too complex to be a TOGC.

The example given in the Brief is the grant of a 999 year lease of a building valued at £1 million under which the freeholder is entitled to receive a ground rent of £100 each year. Taking the value of the right to receive the ground rent together with any other rights retained by the freeholder to be £2,000, this falls within the 1% limit so the transaction is capable of being a TOGC provided all the normal conditions are satisfied.

While the valuation requirement may cause uncertainty in some borderline cases, it is clear that the grant of a very long lease of a pre-let property at a nominal ground rent will now be capable of being a TOGC. This will introduce a greater degree of flexibility in structuring disposals of pre-let property.

HMRC is reviewing its position on whether the surrender of a lease subject to existing tenancies is capable of being a TOGC.  HMRC has resisted TOGC treatment to date on a basis similar to that for the grant of leases.  However, the case for TOGC treatment of lease surrenders appears even stronger, as the surrendering lessee does not retain any interest in the property.  It therefore seems very likely that HMRC will confirm that lease surrenders are also capable of TOGC treatment but they have not yet done so.

HMRC is also considering whether this change of policy will affect properties used other than in a property letting business.

Claims for VAT and SDLT repayment

The change in policy will permit VAT repayment claims, subject to the usual time limits and unjust enrichment rules. HMRC acknowledges that there have been a number of cases in which the parties did not apply TOGC treatment to a transaction in the light of the previous HMRC guidance. Some of these would have resulted in irrecoverable VAT; most would have involved additional SDLT. HMRC confirms  that it will not reject repayment claims on the technical basis that the transferee did not notify the transferor that Article 5(2B) did not apply to its VAT election (the parties would not generally have bothered with such notifications if they did not expect to qualify for TOGC treatment). HMRC will accept that the legal requirement is satisfied if the requisite notification could have been given.

Taxpayers who have suffered irrecoverable VAT on transactions which in retrospect were eligible for TOGC treatment will generally require the co-operation of the lessor to recover the VAT, so should review the terms of the lease and other transaction documents to check their rights.

As for SDLT repayment, HMRC say they are considering this and will provide further guidance soon.

Click here for the Revenue & Customs Brief 30/12 .