Structuring A Property Transfer As A Going Concern: What Are Your Intentions?
The effective structuring of commercial property transactions, in proper compliance with the tax rules, can save substantial sums of money in VAT and in stamp duty land tax (SDLT). But great care must be taken to ensure that the rules are complied with both in substance and in form, otherwise it could prove costly. A decision1 of the tax tribunal illustrates the dangers.
What’s the issue?
On a property purchase where the buyer exercises an option to tax, VAT is added to the purchase price – and SDLT is charged on the gross purchase price. The buyer could then face a substantial SDLT bill. However, if the transaction can be (properly) treated as the transfer of a going concern, VAT can be avoided and SDLT reduced.
What happened in this case?
A freehold site with planning consent for development was being sold; and the seller exercised the option to tax under the Value Added Tax Act 1994. The buyer intended developing the property and both parties discussed structuring the transaction as a transfer of a going concern (TOGC), and did so by agreeing to enter into new leases over a part of the land before the sale. The effect would be that Haymarket (the seller) could recover its input VAT incurred on the consultancy services supplied when it applied for planning permission.
The aim was that Haymarket would be treated as having carried on a property development and lettings business which it then purported to sell on as a going concern – saving £17m in input VAT.
Crucially, the rules require the buyer to continue with the same kind of business as that of the seller to qualify as a TOGC. In this case, it was critical whether or not Haymarket was carrying on a property development business or property lettings business before the sale took place. The contract dismissed any suggestion that it was: it stated that the Haymarket (the seller) was not to implement the planning permission during the contract’s subsistence.
However, it was found that it was not Haymarket’s intention to carry on a property development or lettings business; nor did the parties to the transaction ever intend there to be a transfer of such businesses. These were the commercial realities.
The tax tribunal decided that the sale was not a TOGC for the purposes of VAT. It ruled that “the recoverability of the input VAT did not equate to there being an active property development business”. All it had done, in reality, was secure planning consent - which had enhanced the value of the site.
What does this mean?
The factual and commercial background to this case emphasise that the determination of VAT is, as the tribunal judge made clear, a matter of substance not of form, looking at the circumstances as a whole and having regard to commercial realities.
A vital consideration is whether the effect of the transaction was to put the buyer in possession of a going concern, the activities of which they could carry without interruption.
Genuine compliance with tax rules is expected. Contriving a TOGC when there isn’t one will not be accepted. As always, take specialist tax advice.
Haymarket Media Group Ltd v HMRC [2022] UKFTT 168.
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