Font Size

HM Revenue and Customs Brief 27/14 - Transfer of a Business As A Going Concern

 By

HM Revenue and Customs -Tax Authorities

Tax Articles
Submit Articles   Back to Articles

Issued July 2014

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

Purpose of the Brief

This Brief explains a number of changes relating to the transfer of a business as a going concern (TOGC):

  • a change in HM Revenue & Customs' (HMRC's) policy on whether the surrender of a property lease can be a VAT-free TOGC
  • to clarify the scope of certain aspects of the policy change announced in RC Brief 30/12
  • to explain a change in policy concerning TOGCs of new residential and relevant charitable developments.

Readership

This Brief is for those who transfer their business as a going concern together with an interest in property.

Action required

To note the contents of this Brief and to treat future transactions accordingly.

Scotland

For the purposes of this Brief all references to 'surrender' of a lease include the renunciation of a lease in Scotland, all references to 'assignment' of a lease include the assignation of a lease in Scotland and all references to a 'reversion' retained by a transferor include the heritable title retained by the landlord in Scotland.

1. Surrender of a property lease

Introduction

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.

This intention can be relevant where:

  • an occupier sells a business including the trading premises
  • a landlord sells a property subject to tenancies
  • in some cases where a developer sells a development that is currently in progress

Further guidance can be found in Notice 700/9 and in HMRC's manual Transfer of a going concern.

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.

Change of policy

The Tribunal in Robinson Family Limited ([2012] UKFTT 360 (TC), TC02046) 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, we announced a change of policy on grants of leases in Revenue & Customs Brief 30/12, and said that we were reviewing the position with surrenders of leases. We 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.

Superseded guidance

This revised policy on the surrender of a property lease supersedes the guidance in HMRC's manual at VTOGC6450, which will be amended shortly.

Effective date

While this change of policy is immediate, we accept that there may be situations where customers need to make contractual or systems changes. In order to accommodate this, we are content for customers to delay implementing the change to 4 weeks from the date of this RCB provided that the transferor and transferee both agree to this.

Retrospection: VAT

We accept there will 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.

Where VAT was charged, a difficulty is that the relevant notification (that an option to tax would not be rendered ineffective), will not normally have been given by the buyer (the landlord) to the seller (the tenant). This is a legal requirement in articles 5(2A) and 5(2B) of the VAT (Special Provisions) Order 1995, and it is referred to in paragraph 11.2 of Notice 742A: Opting to tax land and buildings.

Provided, however, that the parties can satisfactorily evidence that article 5(2B) did not apply at the time of the transaction and thus the requisite notification could have been given, we will accept that the legal requirement has been complied with.

Details of how to make any adjustments relating to previous VAT Return periods can be found in VAT Notice 700/45 'How to correct VAT errors and make adjustments or claims' and from the VAT Helpline on 0300 200 3700.

Retrospection: SDLT

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.

The criteria that must be met and the exclusions from claims are set out at paragraph 34A of Schedule 10. Guidance can be found in the Stamp Duty Land Tax Manual (SDLTM) at SDLTM52500 and 54000.

Case G (liability calculated in accordance with practice generally prevailing - SDLTM54170) will not apply, and will therefore not exclude a claim where the amount of the chargeable consideration has been reduced as a result of the seller refunding the VAT.

Claims must be made within four years of the date of transaction. HMRC will be unable to accept any refund requests for transactions that took place more than four years before the date of claim. HMRC will also not refund SDLT unless the overpaid VAT has also been refunded.

2. Clarification of policy change announced in RC Brief 30/12

Revenue & Customs Brief 30/12 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. We said then that we 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.

We 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. The same applies to the change of policy with respect to surrenders announced in this Revenue & Customs Brief.

In Revenue & Customs Brief 30/12, we also said that if the value of the interest retained by the transferor was no more than 1 per cent of the value of the property immediately before the transfer (disregarding any mortgage or charge) that this reversion would be sufficiently small that TOGC treatment could still apply.

This did not address the situation where the lease was of part of a building only.

We have been asked whether, in this case, the 1 per cent calculation considers the value of the entire building, or the value of the part over which the lease is granted.

It was always our intention that the calculation should be based on the relevant part of the building only, and that other areas of the building should be ignored in the calculation, as set out in the example below:

A Ltd owns the freehold of a four-storey building, valued at 4m, which A Ltd rents out commercially. The freehold in each floor is worth 1m. A Ltd sells its property rental business in one of the floors by granting to B Ltd a 999 year lease of that floor, under which A Ltd is entitled to receive a ground rent of 100 each year. The value of that right, together with any and all other rights retained by A Ltd in that floor, is 2,000.

A Ltd has retained 0.2 per cent of the value of its interest in the one floor, and 75.2 per cent of the value of its interest in the building as a whole. The 1 per cent figure mentioned in Revenue & Customs Brief 30/12 is to be considered in relation to the one floor alone. Provided all the normal conditions are satisfied, the transaction will be a TOGC, because HMRC will regard the 0.2 per cent interest retained as too small to disturb the substance of the transaction.

3. 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 (as explained in Notice 708 Buildings and construction and VCONST - Construction). The zero rate is designed to ensure that the development of such properties is ordinarily, largely VAT free.

We 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 - this position is published in our technical manual in VCONST03560. 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, we 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:

a) a zero rated grant has not already been made of the completed building or relevant part by a previous owner (for this purpose, HMRC consider that the grant that gives rise to the TOGC should be disregarded);

b) the person acquiring the building as a TOGC would suffer an unfair VAT disadvantage if its first major interest grants were treated as exempt (for example, a developer restructures its business. This entails the transfer (as a TOGC) of its entire property portfolio of newly constructed residential/charitable buildings to an associated company company, which will make first major interest grants. If these were treated as exempt, the transferee might become liable to repay input tax recovered by the original owner on development costs under the Capital Goods Scheme or partial exemption "claw back" provisions and would incur input tax restrictions on selling fees that would not be suffered by businesses in similar circumstances - we would consider this to be an unfair disadvantage); and

c) that person would not obtain an unfair VAT advantage by being in a position to make zero rated supplies (for example, by recovering input tax on a refurbishment of an existing building).

We will be amending our guidance in VCONST03560 in due course.

The above guidelines also apply in respect of 'person converting' status (for buildings converted from non-residential to residential use) and 'person substantially reconstructing' status (for substantially reconstructed listed buildings).

Although 'person constructing' status may now transfer as part of the TOGC of a property, the 'change of use provisions' would still need to be considered in the case of relevant residential and charitable buildings, i.e. the change in policy on person constructing does not dis-apply the change of use provisions.

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

Who can I contact for further information?

For further information please contact the VAT Helpline on telephone: 0300 200 3700.

The Helpline is available from 8.00 am to 6.00 pm, Monday to Friday.

If you have hearing difficulties, please ring the Textphone service on telephone: 0300 200 3719.


About the Author

Crown Copyright 2014.

A licence is needed to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs.



Follow us @Scopulus_News

Article Published/Sorted/Amended on Scopulus 2014-07-14 10:58:42 in Tax Articles

All Articles

Copyright © 2004-2020 Scopulus Limited. All rights reserved.