If you are involved in either selling or buying a property letting or property development business, whether the transaction is treated as a transfer of a going concern (TOGC) for VAT can have huge implications.
Carolyn Van Hecke, senior VAT manager in our Property and Construction team explains the rules and why it’s important to get the transaction correct at the outset.
What are the rules and implications?
A transfer of a business and its assets as a TOGC is not a supply for VAT provided that the buyer has the intention of using those assets to carry on the same kind of business as the seller. TOGC can apply to property development or property rental businesses too.
From the perspective of the buyer, although any VAT paid will normally be recoverable (to the extent that it is properly chargeable by the seller) and therefore the VAT is usually only a cash-flow cost, Stamp Duty Land Tax (SDLT) is chargeable on the VAT-inclusive price – so failure to secure TOGC treatment will create an additional permanent SDLT cost to the buyer.
If TOGC conditions are met, TOGC rules are mandatory so for example, if a property letting business is being sold and the new owner will continue renting to existing tenants, this will be a TOGC provided:
- The seller is VAT registered and has opted to tax;
- The purchaser is VAT registered or liable to be VAT registered;
- The purchaser has notified HMRC of their option to tax and has notified the seller that this has been done
- The buyer must notify the seller that the article 5(2B) does not apply.
Therefore if the purchaser has an annual rent turnover under the compulsory VAT registration threshold of £85,000 per year, the purchaser is not liable to be registered for VAT so must submit the VAT registration forms before completion to take advantage of TOGC and consider asking for extensions to completion dates if the VAT number has not been received.
What about Capital Goods Scheme (CGS)?
If the buyer is acquiring the business without VAT as a TOGC, the property may have been a CGS asset in the hands of the previous owner.
The CGS is a method of adjusting VAT recovery in line with taxable use and applies to VAT bearing capital expenditure on land and buildings of £250k or more.
Where a capital item is transferred as part of a TOGC then the new owner assumes responsibility for adjustments of income tax required under the scheme.
So, if you are acquiring a property as a TOGC you must confirm with the seller if it is covered by CGS and details of the adjustments already made. You may be required to repay some input tax claimed by the original owner if you make an exempt supply of the property within the CGS adjustment period.
How to protect yourself as a seller?
HMRC won’t provide you with an assurance that your transaction qualifies as a TOGC but if they decide after the event that the transaction was incorrectly treated as a TOGC they will assess the seller for VAT and may also charge penalties.
It’s important therefore for the sale contract to include a clause which stipulates that should HMRC decide that VAT should have been charged, a VAT only invoice can be raised and submitted to the buyer. If the contract is silent regarding VAT then the amount received by the seller is deemed to be VAT inclusive which could leave the seller with a hefty VAT bill.
TOGC and the implications on VAT, SDLT and CGS can be a complicated area and it’s important to get professional advice well in advance of the transaction so that buyers and sellers are protected and maximising all opportunities. For further advice contact us.