HM Revenue & Customs (HMRC) have recently announced a change in VAT policy in relation to the conditions for there to be a transfer of a going concern (TOGC). Their previous view was that when a property business is transferred, for the transfer to qualify as a VAT-free TOGC, the seller had to transfer the whole of their interest in the property to the buyer. In cases where the seller retained an interest and granted a subordinate interest to the buyer such as a lease or a sub-lease, HMRC’s previous policy was that this did not qualify as a TOGC and, in cases where an option to tax had been exercised by the seller, VAT was due on the transfer at the standard rate.

Commenting on a Business Brief issued on 16 th November by HMRC on its change of policy, Lorraine Parkin, Head of Indirect Tax at Grant Thornton UK LLP, said:

"Historically HMRC has refused to accept that there could be a VAT-free transfer of a property business where the vendor retained an interest, for example, the grant of 999 year lease by a freeholder. However, the decision in the Tax Tribunal case Robinson Family Ltd has forced HMRC to change its policy. The case involved the purchase of a 125 year lease and HMRC argued that as the vendor was retaining a part of its interest, it could not be transferring its property business. HMRC lost the case and, rather than appealing the decision, it has confirmed it now accepts that the fact that the transferor of a property rental business retains a small interest in the property does not prevent the transaction from being treated as a TOGC for VAT purposes.

"This is good news for any business that has paid VAT on the purchase of a property business they have not been able to fully reclaim, as there may now be an opportunity to apply for a VAT refund.

"More importantly, the Tribunals decision means that it may also be possible to obtain a refund of stamp duty land tax (SDLT). SDLT is calculated on the VAT-inclusive sale price so if VAT should not have been charged, the business will have paid too much SDLT, ie a further refund may be applicable. Further guidance from HMRC is expected on this point as, under current legislation, adjustments to an SDLT return cannot be made more than 12 months after the filing of the SDLT return.

"In summary, this is good news for any business that has either accounted for VAT on the transfer of a property business in circumstances where the new policy would have meant that no VAT was due, or has paid SDLT on a VAT inclusive price when VAT should not have been charged. Businesses in this situation should consider their position and, where appropriate, should lodge a claim with HMRC."