HM Revenue and Customs Brief 30/12
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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
