On 16 November 2012 HMRC issued Brief 30/12 regarding the transfer of business assets as a going concern (“TOGC”). Although this Brief focuses on the sale of a property letting business via a sub-lease, it also illustrates the wider issue of how difficult it is to interpret the VAT rules for TOGCs, for both the taxpayer and HMRC.
When owners sell or restructure their businesses, rather than sell the shares in the limited company, many prefer to sell the business’ assets: stock, goodwill, properties, etc. The TOGC VAT rules are important for both the vendor and the purchaser in such transactions.
The supply of a business’ assets will be subject to the normal VAT rules. However, if these assets are transferred as a going concern and satisfy the various criteria set out by HMRC, special VAT rules for TOGCs must be applied. Generally, this means that the supply of the business assets will fall outside the scope of VAT.
Purchasers usually prefer the transaction to be treated as a TOGC for VAT purposes, at least to improve cashflow and often to make absolute savings. It is therefore important for the vendor, who has responsibility to charge any VAT, to understand clearly whether the sale of the business’ assets constitutes a TOGC for VAT purposes. However, the criteria for TOGCs are not clear-cut and even small differences in the facts or in the interpretation of the rules can lead to significant disagreements and delays.
As an indication of the areas in which difficulties can arise, below is a “headline” summary of HMRC’s criteria for TOGCs:
- Business test
- Going concern test
- Purchaser’s VAT registration rules
- Continuity test: “same kind of business”
- Continuity test: “no significant break in trading”
- Condition of no consecutive transfers of business
- Special rules for transferring part of a business
- Special rules for transfers involving real estate
HMRC was prompted to issue Brief 30/12 as a result of the difficulties in determining whether a TOGC had occurred in the case of Robinson Family Ltd v Revenue & Customs Commissioners ( UKFTT 360 (TC), released on 29 May 2012).
The vendor, Robinson Family Ltd, owned a 125 years lease in some property which it was letting to tenants. The vendor sold its letting business, but supplied a slighter shorter lease to the purchaser (125 years, less 3 days). Had the assets of the letting business been transferred to the purchaser, so that TOGC rules could apply? Or, as HMRC were arguing, had a new asset (a sub-lease) been created which would not be subject to TOGC rules?
The Tribunal decided that, although the vendor had retained a head-lease and supplied a new sub-lease, the substance of the transaction remained unchanged (i.e. same building, same tenants). The sale of the letting business could therefore qualify as a TOGC.
Business Brief 30/12 now states that it is HMRC’s policy that, if an interest in real estate of no more than 1% is retained by the vendor, HMRC will accept that the transfer could still qualify for TOGC rules.
The TOGC rules are if anything now even more complex. For instance, the 1% limit still seems rather arbitrary and it might still be possible to argue that a TOGC exists even if the vendor’s remaining interest in its real estate exceeds HMRC’s 1% limit. There also remain issues on how to calculate the value of the vendor’s remaining interest. Nevertheless, HMRC’s Brief is to be welcomed.