How do the TOGC rules apply to land and property?

This is a freeview 'At a glance' guide to the Transfer of a Going Concern rules and properties.

At a glance

After losing its case in Robinson Family Limited v HMRC [2012] TC02046, HMRC changed its interpretation of the Transfer Of Going Concern (TOGC) provisions in relation to the grant of interests in land and property.

  • A transfer of a business and its assets as a TOGC is not a supply for VAT, provided that the purchaser has the intention of using those assets to carry on the same kind of business as the seller.
  • TOGC also applies to property development and property rental businesses. 
  • Historically, HMRC had interpreted the legislation to mean that when an interest in land is being transferred it must be the same interest as that used by the transferor in his business in order to qualify.
    • So, if a freeholder grants a 999-year lease the freeholder's business is not transferred as a going concern because what has happened is that a new asset has been created and the original interest in the freehold is retained. 
  • In Robinson, the Tax Tribunal disagreed with HMRC. HMRC decided not to appeal the decision and released new guidance on this topic.

The Robinson case

  • Robinson Family Limited (RFL) was a developer which purchased a 125-year interest in a site owned by Belfast Harbour Commissioners.
  • The terms of the lease were that the site could only be divided up by sub-leases, so RFL granted an interest of 125 years less three days to a purchaser, subject to, and with the benefit of the proposed letting. 
  • HMRC did not treat the grant of the sub-leases as TOGCs, because RFL did not assign the full term of its lease to the purchaser.
    • HMRC's approach followed the second bullet point in paragraph 6.3 of Notice 700/9 (April 2008): Transfer of business as a going concern.
  • The First Tier Tribunal found that, although RFL retained the head lease, that distinct interest in a three-day reversion and the small economic interest which it represented, in no way altered the substance of the transaction.
  • The substance of the transaction was to put the transferee business in a position where it was able to continue the previous lettings business of RFL.
  • On this basis, the Tribunal found against HMRC. 

HMRC's revised interpretation Business Brief 30/12

For a valid TOGC, any interest in land and property retained by the seller has to be shown to be small enough not to disturb the substance of the transaction. 

  • HMRC will accept that a reversion retained by the transferor is sufficiently small for TOGC treatment to be capable of applying if the value of the interest retained is no more than 1 percent of the value of the property immediately before the transfer (disregarding any mortgage or charge).
  • Where more than one property is transferred at one time, this test should be applied on a property-by-property basis rather than for the entire portfolio.
  • If the interest retained by the transferor represents more than 1 percent of the value of the property, HMRC will regard that as strongly indicative that the transaction is too complex to be a TOGC.

HMRC example

A Ltd owns the freehold of a building valued at £1m which A Ltd rents out commercially. A Ltd sells that property rental business by granting to B Ltd a 999 year lease under which A Ltd is entitled to receive a ground rent of £100 each year. The value of that right, together with any and all other rights retained by A Ltd, is £2,000. Provided all the normal conditions are satisfied, the transaction will be a TOGC, because HMRC will regard the 0.2 per cent interest retained as too small to disturb the substance of the transaction.

Retrospective claims? 

There may have been scope for some businesses to claim a repayment of VAT in similar cases. The fact that VAT has been charged may have also led to an overpayment of Stamp Duty Land Tax.

In Revenue & Customs Brief 30/12 HMRC said: 

“Firstly, there is the difficulty that the relevant notification that an option to tax will not be rendered ineffective, will not have been given by the buyer to the seller. This is a legal requirement in articles 5(2A) and 5(2B) of the VAT (Special Provisions) Order 1995, and it is referred to in paragraph 11.2 of Notice 742A: Opting to tax land and buildings.

Provided the parties can satisfactorily evidence that Article 5(2B) did not apply at the time of the transaction and thus the requisite notification could have been given, we will accept that the legal requirement has been complied with.” 

“Secondly, there is the question of whether an adjustment can be made to the SDLT already paid. We are considering this point and will provide further guidance on it soon.”

Further guidance

In December 2018, HMRC updated Notice 700/9 for the 1 percent: previously the guidance had not been changed to reflect Brief 27 (see below) and HMRC's practice in this respect.

The notice now says that a transfer "will also be capable of being a TOGC if you:

  • "Grant a lease of the property, but retain an interest that has a value of no more than 1% of the value of the land or property immediately before the transfer (disregarding any mortgage or charge)".

And will not be capable of being a TOGC if you:

  • "Grant a lease retaining an interest that has a value that is greater than 1% of the value of the property immediately before the transfer (disregarding any mortgage or charge) - where more than one property is transferred at one time, this test should be applied on a property by property basis rather than for the entire portfolio."

Clarification to the 1 percent 'rule' had previously only been issued in Revenue & Customs Brief 27 (2014): transfer of a business as a going concern.

This brief gave guidance on when only part of the building was subject to a new lease: it confirmed that the 1% test looks only at the relevant part of the building, e.g. if you owned a property with 4 floors, each commercially let, and granted a new 999 lease for one of those floors, you can look at what you retained in relation to that floor alone rather than the whole building (making it easier to meet HMRC's 1% test and benefit from TOGC).

Notice 700/9 now also says that where only the beneficial ownership of a property rental business is transferred, and legal title is retained by the seller, there may be a TOGC.

  • If the seller’s ownership is reduced to being no more than that of a bare trustee, HMRC will accept that the property, together with its lettings may be transferred as a ‘going concern’.

Useful guides on this topic

Transfer Of a Going Concern (TOGC)
Buying a business and VAT, do you take over the old owners' VAT registration? What is a Transfer Of a Going Concern (TOGC)? What conditions must be met? What are the consequences of a TOGC? 

TOGC and groups
In a landmark case, Intelligent Managed Services v HMRC [2015] UKUT 341, the Upper Tribunal (UT) decided that the transfer of a business to a VAT group company whose only subsequent supplies are to other members of the same VAT group can be treated as the Transfer Of a Going Concern (TOGC).

Taking over a business (VAT traps)
What do you need to do for VAT purposes if you start to run a similar business to one which operated from the same premises? What if you take over an existing business? What if the business you take over has ceased trading or gone bust?

External link

Robinson Family Limited v HMRC [2012] TC02046

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