Q- Our client is looking to purchase the freehold of an industrial estate made up of six commercial units for £1.8m. They will set up a new limited company to buy the site. Four of the units are tenanted and two are empty. The current tenants have considerable time left on their leases and after the sale, they will remain in place. The vendor is VAT registered as his turnover from the properties exceeds £85,000, and he opted to tax to recover the VAT on the purchase 12 years ago. A deposit is payable to the vendor in 2 weeks’ time and my client’s solicitor is asking whether the transfer of going concern (TOGC) provisions have been met so the sale is outside the scope of VAT. Will this still be a TOGC as the site is only partially let?
A- The TOGC provisions can still apply where a site is purchased and some units are tenanted and some temporarily vacant as long as the units are sold as a portfolio of properties that have been used together as a rental business. This is confirmed in HMRC’s manual VTOGC7050.
Where the conditions are met, TOGC rules are compulsory; the parties cannot choose not to apply them. Where we have the sale and purchase of a property rental business and the new owner will continue renting to the current tenants, this will be a TOGC provided they meet the conditions below.
Where the vendor is VAT registered and has opted to tax, your client must be a taxable person at the time of the transfer (i.e. registered or liable to be registered), and
- Have notified HMRC of his option to tax, and
- Confirmed to the vendor that this has been done and that the option will not be disapplied under the anti-avoidance provisions – also known as the Article 5(2B) declaration. These steps need to be taken no later than the relevant date.
The relevant date is the earliest tax point created for the transaction; in this case, created by the payment of the deposit. Therefore, by the date of the deposit, your client needs to apply for VAT registration (VAT1), and opt to tax the properties (VAT1614A). These two steps will be done together, either online, in which case, there will also be Form VAT5L to complete, or by post. Also before the deposit, a declaration that Article 5(2B) of the VAT (Special Provisions) Order 1995 does not apply must be given to the vendor. Sometimes this is included as a clause in the contract and sometimes a letter to that effect is required. The anti-avoidance measure is referred to in Notice 700/9 (section 2.3.3) with further information in Notice 742A (section 13) and in https://www.gov.uk/hmrc-internal-manuals/vat-transfer-of-a-going-concern/vtogc6100
In very brief terms, a buyer is declaring that neither they, nor any connected party, nor a party funding the purchase, will occupy a building costing £250,000 or more, or already within the capital goods scheme (CGS) in the vendor’s hands, for exempt use, non-business use, or other use where that tenant is not VAT registered. Please refer to the detailed guidance mentioned above.
Be mindful that in a TOGC the client will also inherit any CGS obligations from the vendor. In this instance, the vendor bought the property more than ten years ago so the CGS will not apply to VAT relating to that purchase, but could apply if there has been capital expenditure on the buildings during the last ten years and the VAT bearing cost on a single project was £250,000 or more. Notice 706/2, and in particular section 9 in the case of a TOGC, provides information on the CGS.