HMRC has published details of a change of VAT policy relating to transfers of a going concern following the recent tax tribunal decision in the case of Robinson Family Limited ([2012] UKFTT 360 (TC), TC02046).

This Brief is for traders who enter into property transactions (other than solely as an occupier), and their advisers.

When the assets of a business (or business part) are transferred as a going concern, subject to certain conditions, no supply of those assets takes place for VAT purposes. For this to happen, the purchaser must have the intention of using those assets to carry on the same kind of business as the seller. This is equally the case where the business is that of property development or property rental, and the asset sold is the property.

Previously HMRC has interpreted the law as meaning that, for there to be the transfer of a property rental or property development business as a going concern, the interest in land being transferred must be the same interest as that used by the transferor in his business. For example, HMRC's guidance was that where a freeholder grants a 999 year lease the freeholder's business is not transferred as a going concern because of the interest retained.

In its decision in the case of Robinson Family Limited (RFL), the Tax Tribunal disagreed with this interpretation of the law in the facts of that case. HMRC will not be appealing this decision.

RFL is a property development company which bought a 125 year interest in a site owned by Belfast Harbour Commissioners, with the intention of developing it into 6 units and then granting sub-leases of these to third parties.

The dispute between RFL and HMRC in the end concerned one unit which RFL had been negotiating to let. There was a restriction imposed by Belfast Harbour Commissioners against any sub-division of the site other than by way of the creation of sub-leases, so rather than sell its interest, RFL granted an interest of 125 years less three days to a purchaser, subject to and with the benefit of the proposed letting.

HMRC relied solely on the argument that RFL could not have transferred all or part of its business as a going concern, because it did not assign the full term of its lease to the purchaser.

The Tribunal found that, although RFL retained the headlease, that distant interest in a three day reversion and the small economic interest which it represented in no way altered the substance of the transaction. The substance was still to put the transferee business in a position where it was able to continue the previous lettings business of RFL. On this basis, the Tribunal found against HMRC.

This decision has a number of consequences, not least in cases where VAT was charged and accounted for meaning Stamp Duty Land Tax was then payable on the VAT-inclusive amount. On this particular point, HMRC advise that they are considering this and will provide further guidance.