Sale of Building as TOGC with Lease surrender - They have charged VAT on the surrender but not the sale

Sale of Building as TOGC with Lease surrender -...

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I have a client LLP who purchased a building to rent out.

They have sold the building as a TOGC, they have not charged VAT as they had opted out of this. (They were VAT registered)  They went to a VAT expert who advised that in this case the sale was exempt from VAT.  I am working out the capital gains aspect (loss actually) but on looking at the part disposal info, they have charged VAT on the invoice, which has been added to the VAT return (client does own VAT returns).  As the sale of the building is exempt from VAT, I would have thought that the surrender would also have been exempt given that it has to go down as a part disposal. (as said by VAT expert RE: part disposal) Am i right in thinking that VAT should not have been added to the surrender invocie?  If the client has done this wrong, what is the process to rectify the problem?  A note to consider is that the buyer of the building is different from the surrenderer of the lease!

I would like a little more insight before i ask the client to go back to the VAT expert or speak with them myself.

Thanks in advance for your thoughts

Replies (11)

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By User deleted
16th Mar 2015 12:53

Please clarify

You say that the building was sold as a TOGC, but you are also talking about a surrender. A surrender of what? Please explain exactly who did what.

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chips_at_mattersey
By Les Howard
16th Mar 2015 13:34

Surrender?

BKD is right - the Surrender may have to treated as a separate supply (or non-supply) from the TOGC. The wording of the various Contracts will, I would expect, be determinative in the situation you describe.

What not ask the VAT Expert to clarify, as you have paid him to advise?

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By Taxbreak
16th Mar 2015 13:37

Please spell out the detail(s) of the transactions...

1. If the building was sold as part of a TOGC it may - subject to fulfilment of a number of conditions - correctly not be subject to VAT but this is not possible to tell from the information provided.

2. In general, one cannot simply "opt out" of VAT.

3. A VAT expert says the sale was exempt from VAT - but on what basis? Has the vendor ever opted to tax? Is the sale of a "new" commercial building?

4. Why was VAT charged on the sale?

5. Are you saying that the person who sold the property also surrendered a lease in it?

6. How has there been a part disposal?

7. One would not normally expect the buyer of a building to be the person who surrendered an interest in it...

8. Perhaps you can identify the parties in terms of party, A, B C etc and set out clearly which party did what and who the counterparty(ies) were?

Before anyone can provide any advice, a clear statement of the facts is needed.

 

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By A E Scott
16th Mar 2015 14:57

Sorry for not providing enough info, 

Company A were renting the property from Company B (LLP), Company C purchased the building from Company B.  Company A surrendered the lease early and paid this to Company B who is VAT registered.  Company B charged Company A VAT on the lease surrender, Company B did not charge VAT on the sale of the building to Company C.

The VAT expert advised that the lease surrender receipt was to be treated as capital receipt rather than income.

Company B opted to charge VAT on the rent that they charge.

VAT was charged on the lease surrender and not the sale of the building.

The VAT expert advised "the surrender is treated as a part disposal, and as such a proportion of the initial purchase cost is allowable against the premium as a deduction", 

Hope i have explained everything more clearly.

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By User deleted
16th Mar 2015 15:27

Who was the tenant at the time of sale?

You've said that A surrendered the lease "early" - what does that mean?

Why is the VAT expert advising on CGT matters? (I'm not saying that his analysis is incorrect, but the correct treatment will depend on a number of factors).

As far as  VAT is concerned, my understanding is that the treatment of a surrender payment should follow that of the lease, so on the face of it looks correct. I'm not convinced about the TOGC status of the sale, though.

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By SteveReynolds
16th Mar 2015 16:08

Not exempt !

You are probably incorrect in viewing the sale of the building as exempt. If they had opted to tax on the building and then had a surrender of the lease, then VAT was correctly charged. If they then sold the property to a third party who was also VAT registered and also had opted to tax the property, then it is a TOGC and VAT is not charged despite it being a standard rate transaction.

If the property was not elected to tax then the surrender was not vatable and you would have to look at partial exemption for the client.

I would suggest you get the "VAT expert's" guidance from the client to see exactly what has occured.

 

 

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By User deleted
16th Mar 2015 16:32

I disagree, in part, Steve

If the tenant had already surrendered, and the property the sold without a lease in place, then TOGC treatment could not apply.

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By A E Scott
16th Mar 2015 17:10

With regards to the TOGC, the company taking over the building were continuing to rent it out in the same way as it was rented out previously, just with different tennants, I may have assumed that the tennants have moved out given That they have surrendered the lease, I think it is something that I need to double check with my client. If the tennant moved out after the building was some then would this have an impact in the TOGC?

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By SteveReynolds
16th Mar 2015 17:14

I don't agree

I have had a few of these over the years and the fact that the property was let was not a condition placed on the vendor by HMRC for a TOGC. I can see your point but I have had a vacant building sold under a TOGC and then occupied by the purchasor, all disclosed to HMRC and agreed prior to sale and on a subsequent control visit. Or have the conditions changed ?

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By User deleted
16th Mar 2015 18:15

All I can say, Steve ...

... is that your clients were lucky. It is an express (long-held) requirement that for TOGC treatment to apply in respect of a taxable rental property there has to be a continuing rental business (after all, that is what TOGC means). There has to be, at the very least, an agreement for lease in place.

One example in Notice 700/9:

If you sell a property where the lease you granted is surrendered immediately before the sale, your property rental business ceases and so cannot be transferred as a going concern – even if tenants under a sublease remain in occupation. When the lease is brought to an end the property rental business carried on by the former freeholder has ceased and cannot be transferred.

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By spidersong
17th Mar 2015 09:30

Royal College Pediatrics

For more on these arguments you might want to check out this years upper tribunal appeal against a FTT decision in Royal College of Pediatrics.

Here it was decided that even with a conditional lease agreement in place a transfer of a property didn't class as a TOGC since the lease was only introduced as part of the sale and hadn't originally been part of the vendors business.

So even with a continuing lease in place this one wasn't a TOGC:

http://www.bailii.org/uk/cases/UKUT/TCC/2015/38.pdf

Para 42 and 43 seem particularly salient to the discussion:

"The fact that the seller had a business letting a property before a sale and the buyer buys the property with an intention of letting the property too would make no difference [to whether a TOGC can take  place]. If the sale of the Property had been simply a transfer of the freehold and nothing else then I cannot see how it could possibly be a transfer of a going concern. Something else had to be transferred as well as the property and that further element has to have the appropriate characteristics.

In a normal case of the transfer of a freehold, no doubt it is enough for the extra element to be a transfer of a lease to a tenant or even an agreement with a putative tenant to do so. As long as that lease which is transferred (or the agreement) can truly be said to have been part of the seller’s business then the requirements of the law will be satisfied."

So I'd agree with BKD, Steve's clients have been very lucky, especially if they managed to get a vacant building transfered for their own possesion through as a TOGC!

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