HM Revenue and Customs Brief 27/14 - Transfer of a Business As A Going Concern
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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.
This Brief is for those who transfer their business as a
going concern together with an interest in property.
To note the contents of this Brief and to treat future
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
1. 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.
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 ( 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
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
This revised policy on the surrender of a property lease
supersedes the guidance in HMRC's manual at VTOGC6450, which will be
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
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.
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
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
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
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
If you have hearing difficulties, please ring the Textphone
service on telephone: 0300 200 3719.
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Article Published/Sorted/Amended on Scopulus 2014-07-14 10:58:42 in Tax Articles