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VAT: Concern over Transfer of a Going Concern (TOGC)

View profile for Ian Riley
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HMRC v Royal College of Pediatrics and Child Health, and Coleridge (Theobalds Road) Ltd

Earlier this year a court case decision on VAT in a commercial property transaction has fundamentally changed the manner in which many transactions will be structured.

Most commercial property transactions are exempt from VAT. In some circumstances VAT is payable by the buyer on the purchase price at the “standard” rate (currently 20%). If such VAT is payable, it will have potential financial implications on the buyer, such as:

  • if the buyer cannot recover the VAT, then the price has increased by 20%;
  • if the buyer can recover VAT, then there is a cash flow issue whilst the rebate is awaited from HMRC;
  • Stamp Duty Land Tax is payable on the VAT inclusive price (potentially also pushing the price over the threshold of a higher SDLT percentage rate).

These VAT issues were previously avoided (not evaded!) by utilising the Transfer of a Going Concern (“TOGC”) provisions in section 49 of the VAT Act 1994 and the VAT (Special Orders) Provisions 1995. In a nutshell, if the transaction is a TOGC then it is not subject to VAT therefore no VAT is payable.

Transfer of a Going Concern (TOGC)

So, what is a TOGC? A full explanation is not possible in this short blog. In summary, a sale of a property which is, at the time of completing the purchase, already let to a tenant will be a TOGC. In fact, the lease need not yet be in place, as long as there is an agreement to lease.

Until the recent case was decided it was common to structure the transaction so that the buyer (usually an individual) would take a lease from the seller immediately before completing the purchase. This lease would usually be granted to the buyer’s limited company or pension fund. The buyer is then purchasing the property with an existing tenant. This was thought to be a TOGC across the industry and HMRC’s own guidance also suggested this was a valid TOGC.

The court has now decided that if the arrangement is clearly part of a deal between the buyer and the seller, then it is not a true “transfer of a going concern”. If the tenant is “found” by the buyer, rather than being a pre-existing arrangement with the seller, then it is not a TOGC.

As a consequence, this transaction structure is no longer available to buyers of commercial property. More care is needed in applying the TOGC provisions to a transaction and purchasers should seek advice from a solicitor specialising in commercial property who has a working knowledge of how the VAT laws apply.

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