Transfer of a business as a going concern: Change of practice by Revenue

Transfer of a business as a going concern: Change of practice by Revenue


Author: Niall Murphy

Following the Tax Tribunal's decision in the case of Robinson Family Limited, the Revenue has decided not to appeal.


You may recall our earlier article, Transfer of a business as an ongoing concern, where we addressed the Tax Tribunal's decision in detail.

Instead of appealing the decision, the Revenue has instead issued a new Business Brief (30/12) setting out their revised practice in relation to transfer of a business as a going concern (TOGCs), as it applies to property transactions.

When the assets of a business (or part of a business) are transferred as a going concern, subject to certain conditions, no supply of those assets takes place for VAT purposes. For this to happen, the purchaser must have the intention of using those assets to carry on the same kind of business as the seller.

This is equally the case where the business is that of property development or property rental, and the asset sold is the property, but it can sometimes be less clear when a business is being transferred in these situations.

HMRC has always interpreted the law as meaning that, for there to be the transfer of a property rental or property development business as a going concern (TOGC), the interest in land being transferred must be the same interest as that used by the transferor in his business. It followed from this interpretation that, if what was transferred was less than the transferor's full interest in the land, then the retained interest would prevent there having been the transfer of a property business as a going concern.

For example, HMRC's guidance says that where a freeholder grants a 999 year lease the freeholder's business is not transferred as a going concern because of the interest retained.

In its decision in the case of Robinson Family Limited, the Tax Tribunal disagreed with this interpretation of the law in the facts of that case.

What this means

In light of the Tribunal's decision in the Robinson Family case, HMRC accepts 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, the transaction will be a TOGC if the usual conditions are satisfied.

HMRC is reviewing its policy on whether the surrender of an interest in land can sometimes result in a TOGC. HMRC is also reviewing whether properties which are used in a business other than property letting are affected by this change of policy.

HMRC will accept that a reversion retained by the transferor is sufficiently small for TOGC treatment to be capable of applying if the value of the interest retained is no more than 1% of the value of the property immediately before the transfer (disregarding any mortgage or charge). Where more than one property is transferred at one time, this test has to be applied on a property by property basis rather than for the entire portfolio.

If the interest retained by the transferor represents more than 1% of the value of the property, HMRC will regard that as strongly indicative that the transaction is too complex to be a TOGC.

Impact of the decision on earlier transactions

It will have been the case that purchasers will have accounted for VAT and SDLT on a transaction not treated as a TOGC because of the Revenue's practice.

One of the requirements for a transaction being treated as a TOGC is that the relevant notification under Article 5(2B) of the VAT (Special Provisions) Order 1995 that an option to tax will not be rendered ineffective, will not have been given by the buyer to the seller.

HMRC will accept that provided the parties can satisfactorily evidence that Article 5(2B) did not apply at the time of the transaction and thus the requisite notification could have been given, that it will accept that the legal requirement has been complied with.

The Revenue is currently considering whether an adjustment can be made to the SDLT already paid. It has announced that it will provide further guidance on it soon. This would seem a relatively straight-forward point since under the SDLT legislation a taxpayer has up to four years after the effective date of the transaction to make a repayment claim.