The Indirect Tax world is still quiet due to the Easter holidays. The Court of Justice of the European Union and the UK’s higher courts are currently on a break. However, the First-tier Tax Tribunal continues to issue a number of VAT decisions the highlight of which this week concerns the question of whether the sale of a property subject to an agreement to lease can constitute the transfer of a going concern “TOGC”.
This is an interesting case which warrants a thorough read. In simple terms, Coleridge was the owner of the freehold in a property and the College wished to purchase a property. Coleridge had recently refurbished the property on Theobald’s Road and, on the basis that it intended to let the property after the refurbishment, it had opted to tax the property (or elected to waive exemption).
The College is a registered charity whose activities are predominantly non-business or VAT exempt. As a consequence, if VAT had been chargeable on the supply of the property by Coleridge to the College (as a consequence of the option to tax having been exercised), the College would not have been able to reclaim much, if any of that VAT as input tax.
In its existing property, the College sublet various parts to two affiliated organisations and, when the College decided to purchase the property from Coleridge, the two organisations wished to move with the College and remain its tenants. The parties decided that it was possible to structure the sale of the property by Coleridge to the College in a VAT efficient way by using the relief provided for under the TOGC rules. One of the affiliated organisations entered into an agreement for lease with Coleridge and paid a premium of £1,000 plus VAT to Coleridge. Subsequently, Coleridge then sold the freehold of the property to the College with the benefit of the agreement to lease and the parties treated that sale as a TOGC.
HMRC’s Public Notice on TOGC’s clearly states at paragraph 7.2 that where a property is being sold where a tenant has been found but no lease has yet been signed, if the property is sold to a third party with the benefit of the prospective tenancy, that is sufficient evidence of an intended economic activity for there to be a property rental business capable of being transferred. Despite this clear and, seemingly, unequivocal guidance, HMRC tried to argue that there was no TOGC and that VAT should have been charged by Coleridge to the College.
The Tribunal dismissed HMRC’s arguments and allowed the taxpayer’s appeal. There was clearly a property letting business which was capable of being transferred as a going concern.
Comment – It is not clear why HMRC took this case – given the amount of VAT involved –
(£2.5 million) – perhaps they considered that the insertion of the agreement for lease step was in some way “abusive” in a Halifax sense? If they did, they certainly did not make any such arguments at the Tribunal.