VAT, property and the transfer of a business as a going concern

The supply of a commercial property is generally subject to VAT if an option to tax has been exercised.  Not only does this cause additional SDLT, but there will also be concerns for the purchaser over funding the cashflow before the VAT can be recovered from HMRC.

Given the sums involved in property purchases, it is  desirable that the supply of a property meets the conditions for the transfer of a business as a going concern, and the supply of the property falls outside the scope of VAT.

The importance of this was illustrated by the case of Royal College of Paediatrics and Child Health & others v Revenue and Customs Commissioners ([2015] UKUT 38 (TCC), published on 20 February 2015) (the college).

The college wished to acquire a commercial property over which the vendor had exercised an option to tax.  The vendor had previously leased the property to tenants and although the property was vacant at the time of the college’s interest, the vendor  was still looking to lease its property at the time.  A sale of the property would have given rise to a VAT charge by the taxpayer to the college which was unlikely to be fully recoverable by the college.

The college considered  that, if the property could be supplied to it as part of a property-letting business, the transaction would fall outside the scope of VAT under the transfer of going concern rules.  The college therefore introduced to the vendor a tenant, with whom it had an existing tenancy arrangement to occupy a minimal part of the property and against which it was to pay a minimal amount of rent.  Although the First-tier Tribunal found that the vendor had an existing business which was capable of being transferred by the vendor to the college under the transfer of going concern rules and therefore outside the scope of VAT, the Upper Tribunal has now disagreed.  It found as a matter of fact that the tenant was introduced by the college to the vendor and was not part of the vendor’s business.  There was no business to transfer and the sale of the property was therefore subject to VAT.

This is an interesting example of the complexities involved in identifying transfers of going concerns.  This case did not rely on an abuse of rights or a test of whether the essential aim was the avoidance of VAT.  Instead, the argument accepted by the Upper Tribunal was that there was no business in the vendor’s hands, because there were no existing or expected tenants other than the one introduced by the college which was imposed upon the vendor.  With less aggressive planning, it might have been possible for the college to have secured its property free of VAT under the transfer of going concern rules.

Careful consideration is always necessary when advising on the transfer of property.  Over the years, Gabelle has secured significant savings for many clients in this area.

For further information and help with VAT, property and the transfer of going concern rules, please contact the TaxDesk on 0845 4900 509 and ask for Vaughn Chown.