A taxing question on VAT

Cutbacks iStock 000013353612XSmall 146x219Recent cases at home and abroad have cast doubt on HMRC’s established position on Transfers of Going Concern, writes Bill Chandler.

Many readers will be familiar with the Transfer of Going Concern (TOGC) rules, which provide that Value Added Tax is not chargeable when assets are transferred on the disposal of a business, or part of a business, as a going concern. This includes the transfer of land, even where a VAT election has been made.

TOGC applies not just to trading premises, but also to investment properties owned as part of a ‘property rental business’.

HM Revenue & Customs have always taken the position that TOGC can only apply on the transfer of an existing interest in land and can never apply if a new interest is created. So the transfer of VAT-elected freehold land for £1 million can qualify for TOGC, but VAT must be charged on the grant out of that freehold interest of a new 999-year lease for a £1 million premium, even if the tenant will be using the property to continue the business acquired from the landlord.

But that may all be about to change. Last year, the European Court of Justice intimated in the Christel Schriever case that the grant of a new lease could qualify for TOGC. In that case, the buyer of a sports shop business in Germany was granted a lease of the business premises rather than receiving a transfer of the seller’s existing interest.

Closer to home, the UK’s First Tier Tribunal has recently ruled in the Robinson Family Ltd case that the grant of a 125-year sublease in Belfast Harbour qualified for TOGC relief. In that case the disposal could only be effected by way of subletting due to strict restrictions on assignment of the headlease, and the Tribunal chose to look at the substance of the transaction rather than its legal form.

At the time of writing, VAT Notice 700/9 (‘Transfer of business as a going concern’) still states at paragraph 6.3: "If you own the freehold of a property and grant a lease, even a 999-year lease, you are not transferring a business as a going concern. You are creating a new asset (the lease) and selling it while retaining your original asset (the freehold). This is true regardless of the length of the lease. Similarly, if you own a headlease and grant a sub-lease you are not transferring your business as a going concern."

We await HMRC’s next move, but in the meantime we have uncertainty on an important issue.

Watch this space.

Bill Chandler is a Legal Director at Hill Dickinson LLP. He can be contacted on 0151 600 8725 or byThis email address is being protected from spambots. You need JavaScript enabled to view it..