Their tax advisers said that this should enable the sale to be a transfer of a going concern (TOGC) so, even though there was an option to tax on the land the sale would be VAT free.

They also had a ‘plan B’ for TOGC treatment in that the sale was of a property development business rather than just a site for development.

We know this because the tribunal required all the parties to give full access to their records. Emails between the tax advisers were quoted at length, which HMRC said showed that the sole purpose of the new tenancy was to enable a TOGC. HMRC was at pains to point out that they did not allege abuse, which the tribunal agreed with, albeit the form of the contracts were not the same as the substance of the transaction.

HMRC checked the corporate tax returns of the buyer and when emailed by HMRC about its income status, the responses showed that the buyer did not bill for or receive any rent after the purchase.

The tribunal dismissed the transferring a letting business argument as the tenants at the time of transfer were introduced by the buyer for the purposes of obtaining TOGC treatment. This had echoes of a previous case (Royal College of Paediatrics) where similar steps were taken to prevent the buyer incurring largely irrecoverable input tax, which was also lost.

What was different between the two is that the Royal College of Paediatrics let a room in the property, whereas the seller here let a building on the site.

This seems to be similar but not for VAT: HMRC has different views on what is seen as sufficient to qualify as a property letting business when dealing with a property and a site or estate. It is usually accepted that a room or floor in a building is sufficient, but for a site or estate there are greater risks of failing the sufficiency criteria. Each case must be looked at on the basis of its facts.

But what about the transfer of a property development business?

The tribunal examined marketing material produced by the seller as well as heads of terms for the sale. The latter referred numerous times to vacant possession. The marketing information was about the sale of a development opportunity, not an existing development business. At no point was the seller seen to undertake development, and obtaining planning permission was not sufficient in itself.

This shows that TOGC is obtainable but based on the existing facts rather than looking to manufacture the situation. Also, do not try to get a VAT treatment decided on a definition you cannot verify.

The fact that the buyer could have recovered the VAT was not raised at the tribunal. HMRC sought to assess the seller for failing to apply the correct VAT treatment and was successful. The amount of VAT was £17 million.

P.S. Marketing material is being produced by business advisors about ‘VAT-free property investment’ which relies on TOGC treatment applying. As mentioned above, if the facts fit then fine, but be very wary about either of the parties having to take several ‘unusual’ steps to manufacture a TOGC.

For more information or for a particular enquiry, please contact Ian Marrow via our online enquiry form .

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