VAT planning failed on development land

A transfer of a going concern (TOGC) takes place when an ongoing business is sold. Where certain conditions are met, the sale is outside the scope of VAT.

The conditions are published by HMRC in VAT Notice 700/9 and are:

• the assets, such as stock-in-trade, machinery, goodwill, premises, and fixtures and fittings, must be sold as part of the TOGC
• the buyer must intend to use the assets in carrying on the same kind of business as the seller – this does not need to be identical to that of the seller, but the buyer must be in possession of a business rather than simply a set of assets
• where the seller is a taxable person, the buyer must be a taxable person already or become one as the result of the transfer
• in respect of land or buildings that would be standard-rated if it were supplied, the buyer must notify HMRC that they have opted to tax the land by the relevant date, and must notify the seller that their option has not been disapplied by the same date
• where only part of the business is sold it must be capable of operating separately
• there must not be a series of immediately consecutive transfers of the business.

HMRC confirms in its internal manual at VTOGC7050 that, provided all the other conditions are met, a property letting business can be a TOGC as long as there is a formal lease agreement that continues after the transfer.

Property letting business

Haymarket Media Group Limited (HMGL) owned some land and property at Teddington Studios, Middlesex. The land had been leased to Teddington Studios but they had exercised a break right, with their exit date being 24 December 2014.

On 24 December 2014, when that old lease came to an end, a new lease was agreed. This lease was for a smaller part of the property, for an unspecified duration, to Dartmouth Capital Advisers.

Dartmouth Capital Advisers were advising the buyer of the site and it was suggested that they needed to have premises on the site to oversee some asbestos removal and to set up a sales centre.

The sale of the site was subject to the lease to Dartmouth Capital Advisers and the lease was appended to the sale agreement.

Because of the lease, the parties considered there was an ongoing property letting business and so the sale was treated as a TOGC and no VAT was charged. HMGL also had a secondary argument that, if the sale was not of a property letting business, it was of a property development business.

Tax at stake

HMGL had made an option to tax on the site in question and so, were it not classed as a TOGC, VAT would be chargeable on the sale at 20%. The VAT at stake was £17m, which HMRC assessed on HMGL on 19 January 2019. HMGL challenged this assessment at the first tier tribunal (TC8495).

The VAT would have been recoverable by the buyer and so the real cost would be the stamp duty landtax (SDLT). This is payable on the VAT inclusive price and so would have been an additional cost of £680,000.

HMRC’s argument

HMRC’s case was that, while the company had let properties in the past, there was no property letting business being carried on by HMGL prior to the sale of the site.

In 2013, HMGL made a decision to apply for planning permission to develop the site and in December 2014, planning permission for 213 flats and six houses was granted. The intention was then to sell the site, with planning permission in place for demolition and development.

The site was marketed as: “A rare, riverside development opportunity in prime, South West London”.  The marketing material made it clear that this was the sale of freehold property with the benefit of planning consent, not the sale of a business. 

The conditions of sale drawn up by the selling agent referred to the property being sold with vacant possession. The leases in place at the date of completion were with the purchaser’s tenants and were not the seller’s tenants being passed on as a TOGC.

HMRC did not allege that the arrangements were abusive but felt that the timing and correspondence surrounding the new lease were relevant in deciding whether, in substance, there was a business to transfer. HMRC’s argument was that the lease to Dartmouth Capital Advisers was never part of HMGL’s property letting business and so this could not be a TOGC.

Not a business

The court considered the intentions of the parties and concluded that HMGL was selling a freehold property with a development opportunity, not a development business.

In relation to the property letting business, the property was to be transferred to the buyer with vacant possession and as such there could not have been a property letting business to be transferred on completion.

As there was no property development business, and no property letting business, this could not be a TOGC. As such, VAT of £17m was chargeable on the freehold property sale.

It remains to be seen whether HMGL decides to appeal.