If you have purchased an investment property in the last four years and the transaction was effected by the grant of a long lease, you may be able to reclaim overpaid tax says commercial property agent Prop-Search.
HMRC has always accepted that the sale of a let building is capable of being a transfer of a business as a going concern (TOGC). This is such that it is not regarded as being a supply of either goods or services. As a consequence the normal VAT rules are dis-applied and VAT does not have to be paid in addition to the price paid for the building or business.
Ian Harman, a Director Prop-Search, comments: “Until the end of last year, HMRC was of the view that where a business transfer involved the grant of a new lease – even one as long as 999 years – it was not a transfer of a going concern. Their argument was that as a new asset was being created there was effectively no transfer and in those circumstances VAT would have to be paid.”
However, following the decision in Robinson Family Ltd v HMRC, new guidance has been issued and HMRC now accepts that a business transfer can involve the grant of a new lease, provided that the interest retained by the transferor is small enough not to disturb the overall substance of the transaction.
The case centred on the claimant, a family owned property development company, which purchased the head lease over land owned by Belfast Harbour Estate (BHE) – the landlord. The claimant undertook a redevelopment of the site creating six new industrial units. The case concerned three units sold to a connected company, as a TOGC, by way of sub-lease leaving the claimant with a three-day reversion.
It is notable that the head lease from BHE expressly prohibited an assignment of part of the land. Consequently, the transfer of units could only be affected by way of sub-lease. HMRC denied the claimant TOGC treatment for the sale on the basis that the sub-lease constituted a creation of a new asset rather than the transfer of an existing asset
Ian Harman adds: “Professional advisers have been arguing that HMRC have been getting this point wrong for years. It is generally thought that their stubborn stance has been born out of a fear of increased VAT avoidance.”
The implication is that more transactions will be able to benefit from the transfer of a going concern exemption, with the cash flow benefit that VAT does not need to be paid and reclaimed at a later date. The secondary implication is a saving on Stamp Duty Land Tax (SDLT) liability which would otherwise be payable on any VAT paid in addition to the consideration; a potential saving of £8,000 for every £1,000,000 paid.
There are undoubtedly a number of taxpayers who have paid a significant amount of SDLT on VAT which they will want to reclaim and Prop-Search advises that these can now be made but must be lodged within four years after the effective date of the relevant transaction.
