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HM Revenue and Customs Brief 30/12

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HM Revenue and Customs -Tax Authorities

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Issued: 16 November 2012 - HMRC

Purpose of this Brief

The purpose of this Brief is to explain a change in HM Revenue & Customs' (HMRC's) position following the decision of the Tax Tribunal in the case of Robinson Family Limited ([2012] UKFTT 360 (TC), TC02046).

Readership

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

Action required

To note the contents of this Brief.

Introduction

When the assets of a business (or part of a business) 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, but it can sometimes be less clear when a business is being transferred in these situations.

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 ('TOGC'), the interest in land being transferred must be the same interest as that used by the transferor in his business. It followed from this interpretation that, if what was transferred was less than the transferor's full interest in the land, then the retained interest would prevent there having been the transfer of a property business as a going concern. For example, HMRC's guidance says 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, the Tax Tribunal disagreed with this interpretation of the law in the facts of that case. HMRC will not be appealing this decision.

Robinson Family Limited ('RFL')

RFL is a property development company which purchased a 125 year interest in a site owned by Belfast Harbour Commissioners, which it intended to develop into six units and grant 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. HMRC's approach in the case reflected the guidance set out in the second bullet point in paragraph 6.3 of Notice 700/9 (April 2008): Transfer of business as a going concern:

"If you own the freehold of a property and grant a lease, even a 999-year lease, you are not transferring a business as a going concern. You are creating a new asset (the lease) and selling it while retaining your original asset (the freehold). This is true regardless of the length of the lease. Similarly, if you own a headlease and grant a sub-lease you are not transferring your business as a going concern."

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 of the transaction was 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.

What this means

In the light of the Tribunal's decision in the Robinson Family case, HMRC accepts that the fact that the transferor of a property rental business retains a small reversionary interest in the property transferred does not prevent the transaction from being treated as a TOGC for VAT purposes. Provided the interest retained is small enough not to disturb the substance of the transaction, the transaction will be a TOGC if the usual conditions are satisfied. In this context, the Tribunal's decision does not as such alter any other areas of HMRC's policy on TOGCs, but we are reviewing the policy on whether the surrender of an interest in land can sometimes result in a TOGC. HMRC is also reviewing whether properties which are used in a business other than property letting are affected by this change of policy.

The second bullet point in paragraph 6.3 of Notice 700/9 should be ignored, as we now accept that the creation of a new asset (a lease or sub-lease) and the retention of the original asset (the freehold or a superior lease) is not automatically incompatible with TOGC treatment. The Notice will be updated in due course.

HMRC will accept that a reversion retained by the transferor is sufficiently small for TOGC treatment to be capable of applying if the value of the interest retained is no more than 1 per cent of the value of the property immediately before the transfer (disregarding any mortgage or charge). Where more than one property is transferred at one time, this test should be applied on a property by property basis rather than for the entire portfolio.

If the interest retained by the transferor represents more than 1 per cent of the value of the property, HMRC will regard that as strongly indicative that the transaction is too complex to be a TOGC.

Example

A Ltd owns the freehold of a building valued at 1m which A Ltd rents out commercially. A Ltd sells that property rental business by granting to B Ltd a 999 year lease 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, is 2,000. 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.

The impact of the decision

We accept there are situations where in the past customers did not regard a transaction as constituting a TOGC because of the guidance referred to. In some cases a building would have been sold where an option to tax had been exercised, and the relevant VAT charged and accounted for. SDLT would then have been payable on the VAT-inclusive amount. There are two questions to address where customers wish to retrospectively claim TOGC treatment on account of the Tribunal's decision in the Robinson Family.

Firstly, there is the difficulty that the relevant notification that an option to tax will not be rendered ineffective, will not have been given by the buyer to the seller. 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 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.

Secondly, there is the question of whether an adjustment can be made to the SDLT already paid. We are considering this point and will provide further guidance on it soon.

Retrospective claims

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 0845 010 9000.

Where you are in any doubt about the correct VAT treatment please contact the VAT Helpline.

Notice 700/45 How to correct VAT errors and make adjustments or claims


About the Author

Crown Copyright 2012.

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.



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Article Published/Sorted/Amended on Scopulus 2012-11-21 09:05:06 in Tax Articles

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