VAT - Property TOGCs - Tips, reminders, pitfalls

VAT - Property TOGCs – Tips, reminders, pitfalls

Here’s our ten starters for ten on property TOGCs:

1. Does the Buyer need to opt to tax? It is often assumed that the Buyer always has to opt for the transfer to be a TOGC, but that’s not correct. The Buyer only has to opt if the sale would otherwise be VATable, e.g. if the Seller has opted or the sale is of a “new” commercial freehold, so automatically VATable.

2. Partially let buildings. The basic rule is that if a building is partially let, the whole sale can be a TOGC. The position is slightly less clear where, for example, the part that is unlet is not suitable / available for letting, or where a number of properties are being sold in one bargain and only one or some of them are let. In the latter case, if the properties are one coherent portfolio it may well still be appropriate to treat the whole sale as a TOGC, but the facts need to be looked at carefully.

3. How long must the Buyer carry on the letting? For the transaction to be a TOGC, the Buyer has to intend to carry on the same kind of business, but that does not have to be for an indefinite period. As a rule of thumb in a property investment context, one quarter (spanning at least one rent payment date) is generally considered sufficient.

4. Don’t forget the contractual and practical formalities. If the Buyer needs to opt to tax, that option needs to be made and notified to HMRC before the tax point (normally completion). Also don’t forget the contract needs to contain a statement by the Buyer that its option to tax will not be disapplied under anti-avoidance rules (this is the “Article 5(2B)” provision).

5. TOGCs are assessed on a substance over form basis, so if the parties try to artificially engineer a TOGC, this is unlikely to work. So to take one example from the case law, if the Buyer introduces a tenant to the Seller as part of the sale process purely so as to try and give rise to a letting business of the Seller that can be transferred, this is unlikely to be a TOGC.

6. If the Buyer is not already VAT-registered, this can present an issue for an intended TOGC. The Buyer needs to be registered already or become liable to register by virtue of the transaction. When considering if the latter applies, the Seller’s VATable turnover in respect of the business being transferred is imputed to the Buyer, but if the turnover is below the VAT registration threshold or the Seller’s supplies are exempt, the Buyer won’t become liable to register under this test. This means sometimes it is necessary to wait for the Buyer’s VAT registration to come through from HMRC (which can take many weeks) if the parties want the transaction to be a TOGC.

7. A property transfer can be part of a wider business TOGC, but all the same option to tax rules apply to the property transfer aspect as they would if it was just a single let property being sold as a TOGC. Even if the Buyer acquires the trading property and the rest of the business from two separate entities, the entire purchase may still be a TOGC, but this is fact dependent.

8. Lease grants - until relatively recently, HMRC would not accept that the grant of a lease could be a TOGC, as it constituted the creation of a new interest and not a transfer of an existing one. Now, the grant of a long lease (with an occupational lease in place such that there is a property letting business) which in substance transfers all of the Seller’s economic interest to the Buyer can be treated as a TOGC (HMRC say the Seller can retain no more than 1% economic interest)

9. Lease surrenders – HMRC’s guidance confirms they will accept that a surrender can also be a TOGC– “This will apply, for instance, where a tenant subletting premises by way of business subsequently surrenders its interest in the property together with the benefit of the subtenants, or where a retailer sells its retailing business to its landlord. In substance the landlord has acquired the tenant’s business.”

10. Nominee Buyers and Sellers – the VAT legislation broadly ignores nominee Sellers, i.e. it treats the supply as made by the underlying beneficial owner to whom the consideration flows. For a nominee Buyer, however, there is no such rule so the parties must remember to use a special form of wording in the contract confirming as between the Seller, nominee Buyer and beneficial owner that the nominee is purchasing for the beneficial owner.

As ever, please do get in touch if you need our help on these or any other property tax issues.

Posted on 25/01/2022 in Property Tax News


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