To recover the VAT on costs associated with their commercial properties, the owners of most commercial property rental businesses have opted to tax their portfolios of property and would therefore normally charge VAT on the sale of a commercial property.
Transfer of a Going Concern Provisions
However, the transfer of a business as a going concern (TOGC) is treated as ‘neither a supply of goods nor a supply of services’ for VAT purposes and if the sale meets certain conditions, the supply is outside the scope of VAT and therefore no VAT is chargeable. The TOGC provisions can apply to the sale of an opted commercial building, provided certain conditions are fulfilled.
The basic conditions for a TOGC are:
- an entire business or a part of the business capable of separate operation is transferred as a going concern;
- the purchaser uses the assets in the same kind of business; and
- the purchaser registers for VAT if not already registered or is registerable as a result of the transfer.
Conditions for a Property Business
Additional conditions are required to qualify as a TOGC for a property rental business:
- The property should be tenanted.
- The purchaser is registered for VAT and notifies HMRC of its option to tax (using form VAT 1614A) on or before the date of the transfer.
- The purchaser notifies the vendor that the purchaser’s option will not be disapplied under the anti-avoidance provisions in Special Provisions Order (SI 1995/1268), art 5(2A).
What Counts as Tenanted?
Here are some examples from HMRC of when the sale of a property can be treated as a TOGC. If a business:
- owns the freehold of a property which it lets to a tenant and sells the freehold with the benefit of the existing lease. This is a TOGC, even if the property is only partly tenanted. Similarly, if the business owns the lease of a property and it assigns the lease with the benefit of the sub-lease, this is a TOGC;
- sells a building during an initial rent-free period;
- granted a lease but the tenants are not yet in occupation;
- owns a property and has found a tenant but not actually entered into a lease agreement when it transfers the property to a third party (with the benefit of the prospective tenancy but before a lease has been signed); or
- is a property developer selling a site as a package (to a single buyer) which is a mixture of let and unlet, finished or unfinished properties, the whole site can be regarded as a TOGC.
Examples of where there is not a TOGC are where a business:
- is a property developer and has built a building and it allows someone to occupy temporarily (without any right to occupy after any proposed sale) or it is ‘actively marketing’ it in search of a tenant;
- sells a property where the lease that has been granted is surrendered immediately before the sale – even if tenants under a sublease remain in occupation; or
- sells a property to the existing tenant who leases the whole premises.
This can be a very useful concession, as not only is there a cashflow saving on financing the VAT costs until the input tax on the property can be reclaimed, but there is an absolute saving on stamp duty land tax (SDLT, in England and Northern Ireland) as SDLT is charged on top of the VAT, so if the VAT is avoided there is less SDLT to pay.
Practical Tip
If a business is buying an opted commercial property, it can avoid paying VAT if it can obtain TOGC status for it by registering for VAT, opting to tax and having a tenant in place at the time of the transfer.