Under the UK VAT rules, it is possible for the sale of a commercial rental property to be classified as a Transfer of a Going Concern (TOGC). It is important to take this into account and examine the conditions carefully, as a TOGC can carry major cash-flow benefits and tax savings for purchasers.
Transfer of a Going Concern (TOGC)
The sale of a VAT registered business (or the assets of a VAT registered business) is usually subject to VAT at the appropriate rate.
A transfer of a business (or part of a business) as a going concern for VAT purposes must be treated as "neither a supply of goods nor a supply of services" when certain conditions are met:-
- The assets must be sold as a business as a going concern;
- Where only part of the business is sold it must be capable of operating separately;
- There must not be a series of immediately consecutive transfers of a business;
- The purchaser must intend to use the assets in carrying on the same kind of business as the vendor; and
- Where the vendor is a VAT registered business, the purchaser must already be a taxable person or become one as a result of the transfer.
Where a taxable person wishes to transfer land or buildings as part of a TOCG, the following conditions must also be met:
- The purchaser must have notified HMRC that he has opted to tax the land or buildings before the date of transfer; and
- The purchaser must have notified the vendor that their option to tax will not be disapplied by the same date.
A TOGC is mandatory if the conditions are met so it is very important to establish at the outset whether the transfer is a qualifying TOGC. Incorrect treatment could result in corrective action by HMRC which may attract penalties and/or interest.
If VAT is incorrectly charged:
- The purchaser will be unable to reclaim this amount as input tax, because there was no taxable supply; and
- The vendor will have to cancel any VAT invoice issued and provide the new owner with a refund of the VAT incorrectly charged.
Stamp Duty Land Tax
Stamp Duty Land Tax (SDLT) is usually charged as a percentage of the amount paid for land or buildings on purchase or transfer. Importantly, SDLT is charged on the VAT-inclusive price and can therefore become a "tax on a tax".
Ensuring the TOGC conditions are met can therefore secure a substantial SDLT saving by eliminating SDLT on the VAT element.
Commercial Rental Property as a Business
A single commercial rental property can constitute a business in its own right under the TOGC rules providing it continues to be operated as a rental business by the purchaser. This presents planning opportunities for commercial landlords who might otherwise have to suffer VAT on the purchase of an opted building.
Verfides' comments
Provided that all the necessary conditions are met, the transfer of a commercial property rental business from one taxable person to another will not be treated as a supply for VAT purposes.
Meeting the conditions significantly improves cash-flow for a purchaser and will result in a reduced SDLT charge.
The TOGC rules highlight the importance of taking suitable professional advice before undertaking a property transaction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.