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HMRC VAT Policy Changes on Property & TOGCs

When a business is sold, it is possible for the transaction to qualify as a VAT-free TOGC (transfer of a going concern).  Strict conditions apply, especially when the business involves property. 

This is an area where large values are at stake and it is difficult to correct the position after a transaction has occurred, so care and advice is always recommended.

HMRC have traditionally taken a hard line on certain transactions, deeming them not to qualify for TOGCs.  Following their loss in the Robinson Family Limited VAT Tribunal in 2012, HMRC have undertaken a review of their policies and amended a number of them to make them more flexible.  The changes also have retrospective impact.

1. Surrender of a lease (tenant surrenders lease to landlord)

  • Previously HMRC policy held this could not be a TOGC, as the surrendered lease would merge with the Landlord’s existing interest in the property and therefore the Landlord could not use the lease “asset” in carrying on the same business as the person surrendering it.
  • This policy has changed and HMRC now accept that this blanket approach is incorrect.  Going forward a lease surrender can qualify as a TOGC (in qualifying circumstances and subject to certain conditions).
  • HMRC policy that an assignment of a lease to a new tenant can qualify as a TOGC remains unchanged.

Timing & Adjustments

  • HMRC state that they are content for taxpayers to delay implementing the change for 4 weeks (from 9 July) to avoid unnecessary contractual or system changes.
  • They also accept that past transactions that followed HMRC’s previous policy are open to amendment.  VAT may have been overcharged on the surrender of an opted lease, or VAT recovery restrictions suffered by the tenant where the surrendered lease was exempt in its hands.  Retrospective VAT adjustments are possible subject to the usual 4 year time limits.
  • It may also be possible to reclaim overpaid SDLT where the SDLT base cost had previously been increased by the addition of VAT.

2. Extension of HMRC Policy recognising TOGCs on Granting a lease, and clarification of the 1% rule

  • HMRC announced in 2012 that they had changed their policy to recognise that a grant of a lease could be a TOGC, but only in respect of a transfer of a property rental business.
  • Following review, HMRC have now concluded that their change in policy applies more generally and is not restricted solely to property rental businesses.
  • HMRC have also clarified their 1% value rule regarding the retention of a reversionary interest by the grantor of the lease.  They clarify that the 1% applies only to the part of the building being disposed of, not the whole interest in the property and they provide an example of a Landlord granting a lease of one floor of his four floor property.  The 1% reversionary value rule will only apply to the granting of the lease of the one floor, and not to the value of the whole building.

3. Extension of HMRC Policy recognising TOGCs on new developments of dwellings (and relevant residential and charitable buildings)

  • The first grant of the freehold, or a long lease, in such properties by the “person constructing” is generally zero-rated.  This is straightforward where the party constructing the property sells directly.
  • However, where the project is transferred this can create issues.  HMRC have traditionally taken the view that where a completed building is transferred as a TOGC, the buyer cannot obtain “person constructing” status and therefore cannot make the onward zero-rated sales.
  • HMRC have changed their policy to now accept that the “person constructing” status can be transferred, subject to various conditions.
  • The policy also applies to the transfer of “person converting” status for the conversions of buildings from non-residential to residential and “person substantially reconstructing” status for substantially reconstructed listed buildings.
  • Once again, business can apply these changes retrospectively for the usual 4 year period.

As always, VAT advice should be sought in advance of property transactions as there are many provisions in addition to the above, that need to be considered.  VAT can become a real cost of such transactions, even to fully taxable businesses and it is frequently very difficult to correct VAT issues after the event.

If you think you may be affected by the above in respect of prospective or historic transactions contact Richard Collier on 01727 869 141 to discuss further.



Date: 16th July, 2014
Author: Richard Collier


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