Can I create a transfer of a going concern to minimise my VAT liability?
If VAT would otherwise be payable on the purchase of a commercial property, it is possible, if the property is subject to a lease at the time of purchase, to ensure that no VAT is payable on the purchase price. This can be achieved by ensuring that the transaction is a transfer of a going concern (TOGC) for VAT purposes.
By ensuring the transaction is a TOGC, this will create a VAT saving on the purchase, assuming VAT would otherwise be charged. This saving may only be cashflow if all VAT incurred could be recovered from HM Revenue & Customs (HMRC) but, it will create a real saving, namely a saving of stamp duty land tax (SDLT) which would have been payable on the VAT if charged. SDLT would be payable on any VAT charged regardless of whether the VAT itself can be recovered from HMRC.
The TOGC conditions are not particularly onerous but where taxpayers do sometimes fall foul of these is on the requirement for there to be a business in place at the time of the transfer. This is especially the case where the business that is sought to be transferred is a property letting business. Due to the savings that can be achieved on a TOGC, purchasers do, on occasion, seek to engineer the transfer of a property letting business. This typically involves putting in place lease arrangements as part of the sale so that the property acquired is let by the seller prior to the sale of it. HMRC have challenged some of these arrangements as artificial and have refused to accept that they can constitute TOGCs. In recent tribunal cases these challenges have been successful as the judges have refused to accept that the sellers have had genuine, independent letting arrangements with the tenants prior to the sales of the relevant property. Purchasers have then been left with having to pay the VAT, the SDLT on the VAT and on occasion, interest, and penalties.
If a property is to transfer as a letting business and a TOGC, it is important that the seller has a genuine, independent arrangement with the tenant. Arrangements where the tenant is introduced by the buyer to the seller with the letting agreement being substantively part of the sale arrangements are likely to be attacked by HMRC and on recent experience, successfully so. If you have any queries on the VAT status of your property purchase, our tax team are happy to assist you.