Should VAT be charged when land is transferred as part of a TOGC

Should VAT be charged when land is transferred...

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Hi

My client has an LLP which is a commercial building that they rent out to one firm which in turn use part of the building and sub-let another part.  The LLP intend to sell the building to the sub-lettee, they in turn intend to use the building and rent the other part out.  I am going through Notice 700/9 (December 2012) and have a query on 2.4 which is "should VAT be charged when land or buildings are transferred as part of a TOGC"

All of the TOGC for VAT purpose conditions are met, so I believe the sale should be exempt from VAT but then I have came across the the part where it says election to waive exemption (option to tax) and the dis-application of the purchasers option to tax, this part doesn't really read well.  The building is over 3 years old.

I just need to know what reasons would a purchaser waive exemption for (I will write to HMRC when I have all of the info to clarify the answer, but want to be clued up on all of the terminology before I do)

What is the difference (if any) between option to tax and waive exemption (forgive my ignorance, this is a new area of VAT for me and i need to get it right)

Other notes include, 

- both seller and purchaser are both registered for VAT

- I am not sure what is going to happen with the LLP after the sale, there is nothing else so I can only assume that it will stop trading (the info is quite specific in the selling of the business, the seller as specifically said they are selling the building which is only a building and not a business) which leads me confimr that it is a business asset which can be treated as a TOGC.

Thanks for your guidance in advance.

Replies (3)

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By spidersong
29th Jul 2014 11:26

Is this a TOGC?

Just some quick thoughts;

There have been a number of cases recently on this area, as HMRC used to believe that this sort of thing couldn't be a TOGC.

For a TOGC seller and purchaser need to be using the assets in the same type of business and HMRC only accepted there was a business where the beneift of a tenant passed over with a building. Is that going to be happening here is the sub-letee taking on their existing landlord as a tenant?. Even if they're not there have been cases recently that have challenged and won against HMRCs interpretation of TOGC rules in relation to property businesses, but I must admit I haven't had cause to look at them in detail, so perhaps someone else can fill you in on whether these may affect your transaction. However if the seller has stated they intend to just sell the building with no benefit of the actual business it looks like they plan on not treating it as a TOGC.

Also in order to be a TOGC the purchaser needs to have Waived Exemption which is also known as the Option To Tax (they are the same) before the transfer, otherwise no taxable business can transfer. With no option the letting of a building is exempt so the business would go from taxable letting to exempt letting and would not be a TOGC.

In relation to one of the other parts of your query; The purchaser would waive exemption either to ensure TOGC status and avoid VAT on the transfer (also avoiding the additional SDLT on the VAT element of the transfer value), or if they had purchased the building with VAT they would opt in order to recover that VAT. However if they were planning to occupy the building themselves for taxable purposes then they might not need to opt to achieve recovery.

With your situation and your lack of experience in this area I do believe you would be better seeking formal advice, as I say TOGCs with buildings are on shifting sands at the moment, and the economics of whether to try to force a TOGC will depend on the ongoing use of the building and the proportion of rental income to own use, additionally this is an expensive area to [***] up on! VAT and property is not a simple area to get involved in and is not for the faint hearted, and this doesn't look like a simple case for you to get started on.

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By mdcallen
29th Jul 2014 12:36

togc?

TOGC applies on a transfer of commercial property where there is an ongoing property letting business both before and after the transfer.

In your circumstances there should be an ongoing property letting business in respect of part of the building (let to the main tenant) but not the remainder (sub let becoming owner occupied).

Given the split use of the building, this would lead me to conclude that it not a TOGC. VAT is therefore chargeable.

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By A E Scott
29th Jul 2014 17:58

Thanks for all of the advice and guidance on this, I intend to write to HMRC with all of the facts, so that they can advise accordingly!  Is this the right thing to do?  I know HMRC can be a pain but surly if it is not vatable they have to say!!!!

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