Following a change of policy by HMRC, additional opportunities now exist to save VAT and SDLT on some property transfers.
The key issue concerns when a property transfer can be treated as a transfer of a business as a going concern (TOGC), and hence be free of VAT. Qualifying as a TOGC has several advantages: potential VAT savings (if the transferee cannot reclaim VAT), cashflow benefits (VAT does not have to be paid and then claimed back from HMRC), and reduced stamp duty land tax (SDLT) as this is calculated on the VAT-inclusive transfer price. “The benefits can be substantial,” says Robert Facer,
VAT expert at Moore Stephens.
Since the 2012 Robinson case, HMRC has accepted that, in order to gain TOGC status, the seller of a property rental business does not have to transfer the whole of its interest in the property. “The seller can retain an interest and the transfer still qualify as a TOGC – as long as the interest retained equates to no more than 1% of the property value immediately before the sale,” Robert explains. It is therefore possible for a landlord to grant a new lease with the benefit of an existing tenant and for this to qualify as a TOGC, while still retaining an interest in the freehold (subject to the 1% test).
The good news is that HMRC has now announced a number of further changes to its traditional position on TOGCs. “Most importantly, HMRC now accepts that if a tenant is subletting a property and its lease is surrendered to the landlord with the benefit of the subtenant, that can potentially qualify as a TOGC as well,” Robert says. “This is quite a departure from previous policy. Clients who have suffered a VAT or SDLT cost could revisit those transactions if they took place within the past four years,” Robert says.
Another policy change is that HMRC does not see the 1% test as applying only to property rental businesses. “HMRC now says the 1% test could be used in any kind of business transfer where the assets transferred include property,” Robert says. For example, it could encompass transfers of retail businesses where the seller retains the freehold, but grants a long lease to the new owner of the retail business.
A third, and somewhat technical change, concerns transfers of property development businesses and the ability of the buyer to inherit the VAT status of the person who constructed the property. This could enable VAT recovery in situations where the transferee would otherwise have VAT-exempt status.
“These changes are good news for the taxpayer and there are some potentially significant benefits available” Robert says.
Please get in touch
for advice on how you could benefit from HMRC’s new approach to TOGCs.
ContactsUK VAT team