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HMRC review findings follow Robinson Family case
The surrender of a lease can be treated as the transfer of a business as a going concern (TOGC), HMRC have announced.
The news follows Robinson Family Ltd (TC2046), in which the First-tier Tribunal held that the grant of a lease could be a TOGC in some circumstances and indicated it was necessary to look at the substance of the transaction rather than its form
The Revenue issued Revenue & Customs Brief (RCB) 30/12 in response to the case and has now published the follow-up, RCB 27/14, which covers the findings of a review of the surrender of leases.
The department decided there is no obstacle, in principle, to the surrender of a lease being a TOGC, subject to all normal conditions. The position will apply where a tenant subletting premises by way of business subsequently surrenders its interest in the property together with the benefit of the subtenants, or where a retailer sells its retailing business to its landlord. In substance, the landlord has acquired the tenant’s business.
HMRC’s change of policy has immediate effect, but taxpayers who need to implement contractual or systems changes have until four weeks from the date of RCB27/14.
The change of policy referred to in RCB 30/12 applies generally, says the taxman, and is not confined to property letting businesses – and the calculation should be based only on the relevant part of the building; other areas of the building should be ignored.
The tax department is set to revise the guidance on TOGCs of new developments of dwellings, relevant residential and relevant charitable buildings. The first grant of a major interest (freehold sale or long lease) in residential or relevant charitable property by the “person constructing” is generally zero rated.
HMRC previously took the view that “person constructing” status does not move to a person acquiring a completed building transferred as a going concern – but recent cases highlighted that such transactions could lead to inequality of VAT treatment contrary to the purpose of the zero rate and could be in breach of the EU Principle of Fiscal Neutrality.
The Revenue has accepted that a person acquiring a completed residential or charitable development as part of a transfer of a going concern inherits “person constructing” status and is capable of making a zero rated first major interest grant in that building or part of it as long as:
- a zero rated grant has not already been made of the completed building or relevant part by a previous owner;
- the person acquiring the building as a TOGC would suffer an unfair VAT disadvantage if its first major interest grants were treated as exempt (for example, a developer restructures its business; and
- that person would not obtain an unfair VAT advantage by being in a position to make zero rated supplies.
The guidelines also apply in respect of “person converting” status for buildings converted from non-residential to residential use and “person substantially reconstructing” status for substantially reconstructed listed buildings.
