TOGC provisions for buying a business
Normally, the sale of the assets of a VAT registered business is subject to VAT. However, a transfer of a business as a going concern (TOGC) is treated as ‘neither a supply of goods nor a supply of services’ for VAT purposes, and if the sale meets certain conditions then the supply is outside the scope of VAT, and therefore VAT is not chargeable.
This treatment applies when:
- An entire business is transferred as a going concern; or
- A part of the business capable of separate operation is transferred as a going concern; and
- The purchaser uses the assets in the same kind of business; and
- The purchaser registers for VAT if not already registered, or is registerable as a result of the transfer.
However, where a business is not ‘registerable’, i.e. the turnover is below the VAT registration threshold (which could be the case where you are purchasing one property of a portfolio), then for it to qualify as a TOGC the purchaser must be registered or accepted for registration at the time of the transfer. Applying for VAT registration does not mean that it has been accepted. If the registration has not been processed by HMRC at the time of the sale of the business then, technically, it is not a TOGC and VAT should be charged.
Buying a commercial property
In order to recover the VAT on associated costs, the owners of most commercial property rental businesses have opted to tax their portfolios of property and would normally, therefore, charge VAT on the sale a commercial property. However, the TOGC provisions can apply to the sale of an opted commercial building, providing certain conditions are fulfilled. This can be a very useful concession, as not only is there a cashflow saving on financing the VAT costs until the input tax on the property can be reclaimed, but there is an absolute saving on the stamp duty land tax (SDLT), as SDLT is charged on top of the VAT, so if the VAT is avoided then there is less SDLT to pay.
The conditions required to qualify as a TOGC of a property are:
- The property should be tenanted (see below for examples of what qualify);
- The purchaser is registered for VAT and notifies HMRC of its option to tax on or before the date of the transfer; and
- Notifies the vendor that the purchaser’s option will not be disapplied under the anti-avoidance provisions in Special Provisions Order (SI 1995/1268), art 5(2A)
What counts as being tenanted?
Here are some examples from HMRC of when a business can be treated as being transferred as a going concern.
If a business:
- Owns the freehold of a property which it lets to a tenant and sells the freehold with the benefit of the existing lease, a business of property rental is transferred to the purchaser. This is a TOGC even if the property is only partly tenanted. Similarly, if the business owns the lease of a property (which is subject to a sub-lease) and it assigns the lease with the benefit of the sub-lease, this is a TOGC;
- Owns a building which is being let out where there is an initial rent-free period, even if the building is sold during the rent-free period, the business is carrying on a property rental business;
- Granted a lease in respect of a building but the tenants are not yet in occupation, the business is carrying on a property rental business;
- Owns a property and has found a tenant but not actually entered into a lease agreement when it transfers the property to a third party (with the benefit of the prospective tenancy but before a lease has been signed), there is sufficient evidence of intended economic activity for there to be a property rental business capable of being transferred;
- Is a property developer selling a site as a package (to a single buyer) which is a mixture of let and unlet, finished or unfinished properties, and the sale of the site would otherwise have been standard rated, then subject to the purchaser electing to waive exemption for the whole site, the whole site can be regarded as a business transferred as a going concern.
Examples where there is not a TOGC
These include if a business:
- Is a property developer and has built a building and it allows someone to occupy temporarily (without any right to occupy after any proposed sale) or it is ‘actively marketing’ it in search of a tenant, there is no property rental business being carried on;
- Sells a property where the lease that has been granted is surrendered immediately before the sale, the property rental business ceases and so cannot be a TOGC - even if tenants under a sublease remain in occupation;
- Sells a property to the existing tenant who leases the whole premises, this cannot be a TOGC because the tenant cannot carry on the same business of property rental; or
- Has granted a lease in respect of a building and the tenant is running a business from the premises. The tenant then sells the assets of his business as a TOGC and surrenders his lease. The business grants the new owner of the business a lease in respect of the building. This is not the TOGC of a property rental business.
Following the tribunal’s decision in Robinson Family Ltd v Revenue & Customs Commissioners [2012] UKFTT 360 (TC), HMRC now accept that the fact that the transferor of a property rental business retains a small reversionary interest in the property transferred does not prevent the transaction from being treated as a TOGC for VAT purposes. Provided the interest retained is small enough not to disturb the substance of the transaction (no more than 1% of the pre-transfer value), the transaction will be a TOGC if the usual conditions are satisfied.
A single tenanted building can count as a business for TOGC purposes. However, that is not so if it is sold to a company in the same VAT group as the tenant. This is because HMRC interpret the grouping rules as meaning that, as there is no supply within the VAT group, the property rental business has ceased to exist when the sale takes place.
Problems with beneficial ownership
If a business is selling a tenanted property to a nominee acting for an undisclosed beneficial owner, the transaction cannot be a TOGC.
If the beneficial owner is named, that person, the nominee and the purchaser can agree to treat the sale as a TOGC, but each party must sign a written agreement confirming this. This is because the beneficial owner is regarded as the transferee for TOGC purposes, and the person who must opt to tax the property issues a certificate to the vendor and registers for VAT.
It is for the parties to decide whether to use this concession by HMRC. However, if it is not done and VAT is charged, it will only be recoverable as input tax if the beneficial owner immediately registers for VAT and opts to tax the property anyway!
Practical Tip:
If you are buying an opted commercial property, you can avoid paying VAT if you can obtain TOGC status for it by having a tenant in place and being registered for VAT and opting to tax it at the time of the sale.
