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Construction, Land and Property

Deposits affecting the VAT treatment of property transactions

by Ian Marrow

A VAT case has highlighted the importance of meeting all the conditions to enable a transfer of a property business to be treated as a transfer of a going concern (TOGC). Where such a transaction is a TOGC no VAT is due on the sale.

The taxpayer (T) was the seller of four commercial properties. T had opted to tax each property when it was acquired.

To enable TOGC treatment, in addition to the other criteria, the purchaser (P) needs to, no later then the relevant date, have exercised an option to tax in relation to the land/property which has effect on the relevant date.

So the key question was what was the relevant date for the deals?  The legal definition is: ” relevant date” means the date upon which the grant would have been treated as having been made or, if there is more than one such date, the earliest of them .”

For most transactions this equates to the date of completion, but this case focused on the issue of the payment of a deposit by P.

In two of the deals the recipient of the deposit was T’s solicitor acting as agent for T rather than stakeholder. As such the Tribunal ruled that the relevant date was when the deposit was paid. In these instances the option to tax was notified to HMRC before completion but after the deposit was paid so after the relevant date. The Tribunal ruled that the deal was not a TOGC and VAT was due on the sales.

Although the deposits were only for 10% of the net price, the Tribunal ruled that this created the tax point for the whole value of the sale.

In one instance the deposit was taken by the Auctioneer handling the sale of the property. The Tribunal ruled that the deposit was taken under the terms of the Common Auction Conditions (“CAC”), unless there were special measures to override the CAC. The CAC provides for the auctioneer to accept deposits as stakeholder and so that test was met and the transaction was a TOGC.

The final sale was a prime example of Murphy ’s Law. The transaction was more complicated as it involved the novation of the original sale contract to a new purchaser (“NP”). A recent Tribunal saw a similar scenario as the sale of the novation rather than the property but that was not this Tribunal’s approach. The relevant date was established in this case to be the date of novation, January 9 rather than the date of the initial deposit which was 2 December of the previous year. The NP had submitted an option to tax to HMRC on 6 January, but had requested an effective date of 10 January. Therefore, the option was not effective on the relevant date and the sale was taxable, not a TOGC.

The case highlights the difficulties in ensuring that the TOGC treatment can apply. Although nearly six years old, it is still relevant and highlights the importance of getting details right when it comes to getting TOGC status.

If you have any questions in regard to this issue please contact our VAT Associate, Ian Marrow .

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