Last November, following the decision in the case of Robinson Family Limited, HMRC announced that a transfer of a property rental business can qualify as a "transfer of a going concern" (TOGC) – and therefore not attract VAT – even if the transferor retains a reversionary interest in the property.

This effectively reversed the established HMRC view. Previously, TOGC treatment was denied on the grant of a new lease. Any interest in the land retained by the transferor prevented the transfer of a property rental business being a TOGC.

Stamp duty land tax (SDLT) is calculated on the premium paid for the grant of a lease, plus VAT (if payable). Parties to historic transfers of property rental businesses may therefore have 'incorrectly' paid VAT, and overpaid SDLT.

In November HMRC confirmed that it would accept claims for VAT incorrectly accounted for where VAT was paid based on previous HMRC guidance that TOGC treatment would not apply in such cases. On 15 April 2013, HMRC also confirmed that claims could be made for overpaid SDLT.

In each case claims must be made within 4 years of the grant of lease.

Confirmation that SDLT can be reclaimed is particularly welcome, as SDLT (unlike VAT in most cases) is an irrecoverable cost for a transferee.

HMRC's revised position is summarised below.

HMRC's position since November 2012

HMRC now accept that:

  • the grant of a new lease or sub-lease is not automatically incompatible with TOGC treatment
  • but retention by the transferor of the freehold, or superior lease, must not "disturb the substance of the transaction"

In HMRC's view TOGC treatment can apply if the value of the retained interest does not exceed 1% of the value of the property immediately before the transfer.

HMRC give the example of a grant by A to B of a lease for a term of 999 years of a property valued at £1m. A is entitled to an annual ground rent, a right valued at £2,000. TOGC treatment would be available, subject to the other conditions being met, as HMRC would regard the interest retained (0.2% of the value) as too small to disturb the substance of the transaction.

Comment

  1. HMRC's reversal is welcome, but in scope it is arguably narrower than the Robinson decision. HMRC have introduced a valuation approach to Robinson's "substance over form" analysis. This creates certainty, but requires that the value of the property and the retained reversionary interest must be known before the TOGC position can be determined
  2. A retained reversionary interest value in excess of 1% does not automatically mean that TOGC treatment will not be available. It is merely "strongly indicative" that it will not be
  3. HMRC are considering whether the surrender of an interest in land can ever be a TOGC. Based on the Robinson "substance over form" analysis, there is no logical reason why the surrender by a head lessee of its lease to the freeholder cannot be a TOGC