property 39
Where does VAT figure in property transfers?
James Hurst, VAT partner at Grant Thornton UK LLP, looks at the consequences of a recent tribunal decision relating to transfers of going concerns
From a VAT point of view, the transfer of a business as a going concern (a TOGC) should, if all of the relevant conditions are met, be concluded without the need for the vendor to charge and account for VAT. This is because, in the right circumstances, the effect of VAT law is to deem that, although there is clearly a transfer of a collection of assets for valuable consideration (otherwise known as a supply where VAT would be due), there is no supply and, as a consequence, there is no VAT payable.
Where an investment property is being sold (ie there is a transfer of a property letting business), a number of conditions must be met for the transfer to be treated as a TOGC. Until recently, one of these conditions was that the interest held by the vendor had to be transferred to the purchaser. HM Revenue & Customs’ (HMRC’s) published policy was that if the vendor owned the freehold, to qualify as a TOGC, the vendor had to transfer the freehold to the purchaser. Similarly, if the vendor owned a leasehold interest, it was that interest that had to be assigned to the purchaser.
In a recent case, however, this policy has been successfully challenged at the First-tier Tribunal (FTT). Robinson Family (the company) owned a number of investment properties under a headlease but, due to a restriction in that headlease, when the company wished to transfer its investment property business to a third party purchaser, it was prevented from assigning its lease and had, instead, to grant a sub-lease to the purchaser for the same term as the headlease save for three days. All of the other conditions for the transfer to qualify as a TOGC were met but HMRC argued that, in accordance with the published policy, as the vendor had retained a reversionary interest in the property, the transfer did not qualify as a TOGC.
The FTT dismissed HMRC’s arguments. Essentially, the tribunal confirmed that, taking a substance over form approach, the economic reality of the transfer was that the company had transferred its investment property business to the purchaser. The purchaser intended to exploit the property in exactly the same way as the vendor and, as such, the fact that the legal interests held by the parties
THE BUSINESS MAGAZINE – THAMES VALLEY – MARCH 2013
were different did not prevent there being a TOGC.
By its publication of the Revenue & Customs Brief 30/12, HMRC has accepted that its previous policy was incorrect. The Brief confirms that HMRC is not to appeal the FTT’s decision in the Robinson Family case. However, in typical HMRC fashion, its acceptance of the FTT’s decision is not complete. Although the Brief confirms that if a small reversion is retained by the transferor, HMRC will accept that a TOGC can take place, it then states that this will only be accepted if the reversion retained is sufficiently small. The Brief states that TOGC treatment will only apply in cases where the value of the reversionary interest retained by the transferor is less than 1% of the value of the property before it is transferred.
The tribunal’s decision in Robinson Family confirmed that, although the headlease had been retained, a ‘distant interest in a three-day reversion and the small economic interest which it represented in no way altered the substance of the transaction’. Exactly how and why this 1% de-minimis value has been determined by HMRC is unknown. This new policy therefore seems to be as incorrect as the old policy as nowhere in the decision does the tribunal suggest a 1% threshold above which the substance of the transaction is altered. If HMRC insists on applying that new 1% limit, it can only lead to further litigation. As the tribunal clearly hinted, it is the substance of the transaction that matters not, as HMRC would have it, the value of the interest retained by the transferor.
The Brief has also confirmed that HMRC is reviewing whether the surrender of an interest in land can sometimes result in a TOGC and whether properties which are used in a business other than property letting are affected by this change of policy. In principle, it is difficult to see why they should be treated any differently. Where, for example, a business occupies a property under a lease and grants a sub-lease to a tenant which pays rent, if (for whatever reason), the business surrenders its lease such that the sub-tenant continues to pay rent to the head lessor, is the substance of the transaction not the same? Similarly, where, for example, a manufacturer
occupies a property under a lease and sells the business but retains a small reversionary interest in the property, why should that transfer be treated any differently if the substance of the transaction is to put the new owner in a position where it is able to continue the manufacturing business?
There will, undoubtedly, be cases in the future that will test the legal validity of this new policy. For those advising on property transfers as a TOGC, a close eye will need to be kept on these developments.
Details: James Hurst 0118-9559232
james.hurst@
uk.gt.com
www.businessmag.co.uk
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