When is the Sale of Property a Transfer of a Going Concern (TOGC) for VAT purposes?
Land and property VAT is one of the most complex and difficult areas of the UK VAT regime. The rules are extremely complicated and affect what are often very high-value and ‘one-off’ transactions.
Should the vendor charge VAT? Does the vendor have the correct documents in place? Are a number of questions that are usually asked towards the end of the negotiation process when a property is being sold.
The sale of property by a VAT registered business will be either exempt from VAT or subject to VAT at the standard rate, where it has been opted to tax. However, where the sale meets the relevant TOGC conditions it must be treated, by virtue of Regulation 6 of The Value Added Tax Regulations 1995, as “neither a supply of goods nor a supply of services”.
It is the vendor who is responsible for applying the correct VAT treatment and will be required to support their decision. Where the sale meets the TOGC conditions, the sale is outside the scope of VAT and therefore VAT is not chargeable.
Therefore, the purchaser not only gains a cashflow advantage, but also (as Stamp Duty Land Tax (SDLT) is charged on the VAT inclusive amount) an SDLT saving.
The TOGC conditions that must be met are as follows:
- The assets must be sold as a business, or part of a business, as a going concern
- The assets must be used by the transferee in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the transferor in relation to that part
- There must be no break in trading
- Where the seller is a taxable person (VAT registered) the purchaser must be a taxable person already or immediately become, as a result of the transfer, a taxable person
- Where only part of a business is sold it must be capable of separate operation
- There must not be a series of immediately consecutive transfers
- the purchaser must opt to tax the property and notify this to HMRC no later than the date of the sale. This may be the date of completion or, if earlier, the date of receipt of payment or part payment (eg; a deposit).
- anti-avoidance requirements regarding the buyer’s option to tax
The sale of a tenanted property with the benefit of the existing lease may qualify as a TOGC if the above conditions are met. This would then be the sale of a property rental business rather than of the property itself.
It is important to note that TOGC treatment is not optional, it is mandatory. A sale is either a TOGC or it isn’t. It is a rare situation in that the VAT treatment depends on; what the purchaser’s intentions are, what the seller is told, and what the purchaser actually does. All this being outside the seller’s control.
Therefore, it is crucial to review the sale and purchase contracts to ensure that it includes the relevant clauses to meet the TOGC conditions, as well as ensuring the client is protected.
It is common in complex property transactions to charge VAT as either the TOGC position is missed or it is considered the safest way to protect the vendor. However, incorrectly charged VAT is not recoverable and will be disallowed when the purchaser attempts to recover it.
We recently had a case where the purchaser’s accountant submitted his client’s VAT registration documents to HM Revenue and Customs (HMRC) and requested an effective date of VAT registration to be the day before the relevant date. However, as HMRC had not responded before the transfer it was assumed that the purchaser was not VAT registered and the seller charged VAT on the property.
Once the purchaser’s VAT registration was granted, they attempted to recover the VAT on the purchase of the property. HMRC refused the input tax claim on the basis that the purchaser was VAT registered at the time of the transfer due to the requested date of registration.
Therefore, VAT had been charged incorrectly by the seller and was not recoverable from HMRC. The purchaser had to request a refund from the seller and attempt to get a refund of the incorrectly charged VAT, that the seller had already paid over to HMRC.
In this instance the purchaser was very lucky, and was, albeit after some time, able to obtain a refund of the VAT. If the contract does not address this issue, the vendor will not be liable to refund the incorrectly charged VAT.
Furthermore, as SDLT is paid on the VAT inclusive value of property the purchaser had also submitted an incorrect SDLT return and paid too much SDLT. This also had to be rectified.
This resulted in the client paying significantly more in professional fees to correct the situation, than it would have had it sought professional VAT advise at the onset.
When one or more of the TOGC conditions are not met, but the property is transferred outside the scope of VAT, then there is an underdeclaration of VAT. The vendor may be assessed by HMRC for this underdeclaration and penalties and interest are likely to be charged.
The vendor will than attempt to obtain the VAT payment from the purchaser. Similarly, to above, this is not always straightforward or possible and it may be that the contract prohibits additional payment. There is likely to be unexpected funding issues for the buyer if (s)he does decide or is liable to make the payment.
In conclusion, this is a complex area of VAT law and due to the considerably high value of sales of property, the VAT cost of getting it wrong can be significant.
Furthermore, the extensive case law in this area shows the difference between a commercial interpretation of a going concern and HMRC’s view.
It is extremely important to review contracts from a VAT perspective, as terms within the contact could affect the VAT position not to mention ensuring the client is protected.
We strongly recommend that specialist VAT advice is sought in all property sales.