The above Brief explains a number of changes relating to the transfer of a business as a going concern (TOGC).

Specifically the Brief:

• covers a change in HMRC’s policy on whether the surrender of a property lease can be a VAT-free TOGC
• clarifies the scope of certain aspects of the policy change following the decision of the Tax Tribunal in the case of Robinson Family Limited ([2012] UKFTT 360 (TC), TC02046), as announced in Brief 30/12
• explains a change in policy concerning TOGCs of new residential and relevant charitable developments

Surrender of a property lease

When the assets of a business (or part of a business) are transferred as a going concern no supply of those assets takes place for VAT purposes. There are certain conditions to be met for the transfer not to be treated as a supply for VAT purposes, among which is that the buyer must intend to use the assets to carry on the same kind of business as the seller.

If the seller is a tenant, an outright disposal of the property might take the form either of an assignment of the lease or a surrender of the lease. In an assignment, the buyer simply becomes the new tenant under the lease. HMRC has long accepted that, if the other conditions were met, the assignment of a lease with the benefit of a sublease could be a TOGC.

In a surrender, however, the buyer is the landlord, and the lease will normally merge with the landlord’s existing interest in the land and will cease to exist. HMRC has historically taken the view that, where this happens, the transaction could not be a TOGC because the landlord would not use the same asset, the lease, in carrying on the business. This policy has now changed as a result of the Tribunal decision in Robinson Family Limited ([2012] UKFTT 360 (TC), TC02046)

This case held that the grant of a lease could in some circumstances be a TOGC, and indicated that ‘one must look to the substance of the transaction’ rather than its form. In the light of that decision, HMRC announced a change of policy on grants of leases in Brief 30/12, and said that they were reviewing the position with surrenders of leases. HMRC have now concluded that review.

HMRC now considers that there is in principle no obstacle to the surrender of a lease being a TOGC, subject to all the normal conditions. This will apply, for instance, where a tenant subletting premises by way of business subsequently surrenders its interest in the property together with the benefit of the subtenants, or where a retailer sells its retailing business to its landlord. In substance the landlord has acquired the tenant’s business. Note that this applies equally where the landlord’s interest is held via one or more nominees, so that the transaction involves a transfer to the nominee(s) for the landlord’s benefit.

The Brief also outlines the effective date of this change and accepts that there may be cases where in the past, businesses did not regard a surrender of a lease as constituting a TOGC in the light of HMRC’s then policy, and may now be able to do so, subject to the normal time limits. In such circumstances VAT may have been charged where it need not have been. Alternatively, input tax may have been restricted because the surrender was treated as an exempt supply.

Retrospection: SDLT

The Brief also outlines that there may be situations where a past overpayment of VAT resulted in an overpayment of Stamp Duty Land Tax (SDLT), because SDLT was assessed on a value that incorrectly included VAT. If a business believes that it has overpaid SDLT, it may make a claim for overpayment relief. The legislation relating to such claims is at schedule 10, paragraph 34, FA 2003. Claims must be made within four years of the date of transaction. HMRC will also not refund SDLT unless the overpaid VAT has also been refunded.

Clarification of policy change announced in Brief 30/12

This Brief announced a change of policy on whether the grant of a lease could be a TOGC, but referred only to the transfer of a property rental business. HMRC also advised that they were reviewing whether the change of policy also affected properties used in a business other than property letting. An example would be where a retailer disposes of the retail business but transfers the premises by granting a lease.

HMRC have completed this review, and concluded that the change of policy referred to in Revenue & Customs Brief 30/12 applies generally, and is not confined to property letting businesses.

Revision to guidance concerning TOGCs of new developments of dwellings, relevant residential and relevant charitable buildings

The first grant of a major interest (freehold sale or long lease) in residential or relevant charitable property by the ‘person constructing’ is generally zero-rated. This is designed to ensure that the development of such properties is ordinarily, largely VAT free.

HMRC have traditionally taken the view that ‘person constructing’ status does not move to a person acquiring a completed building that is transferred as a going concern. However, recent cases in this area have highlighted that such transactions could lead to inequality of VAT treatment that is contrary to the purpose of the zero rate and could be in breach of the EU principle of fiscal neutrality.

Having reviewed the position, HMRC now accept that a person acquiring a completed residential or charitable development as part of a transfer of a going concern inherits ‘person constructing’ status and is capable of making a zero rated first major interest grant in that building or part of it as long as certain conditions are met.

HMRC advise that businesses are entitled to claim retrospective effect of this policy (subject to capping) if they fit within the above criteria.

More detailed information on all of the above is available in the Brief.