Option to Tax and Transfer of a Going Concern. Why seek advice?

A recent VAT case from the Chesterfield area highlights the importance of taking advice.  The case involved the transfer of a property business and so combined the complex areas of both Option to Tax and “Transfer of a Going Concern” (TOGC) rules of VAT.

The TOGC rules allow a business to be transferred without VAT being charged. Provided certain conditions are met, this can be a valuable benefit that can aid cash-flow and avoid problems recovering VAT from HMRC.

When a property letting business is transferred it can sometimes be treated as a TOGC provided additional conditions are met. The receipt of rent from a commercial property is usually exempt from VAT.  This means that VAT is not charged, but it also means the landlord cannot recover input VAT on any expenses incurred on running the lettings business.

This could be a problem if the landlord spends significant amounts of money on the property, for example on the refurbishment; and so HMRC allow a landlord to elect for an exempt property to become taxable.  This is known as the Option to Tax.  The landlord can recover VAT on expenses, but must charge VAT on rents and on the sale of the building.

If the landlord sells the building with a tenant in place, this could qualify as the sale of a property business and not just the sale of a property.  This is an important distinction and means that the sale could be treated as a TOGC without VAT being charged.

However, to qualify as a TOGC, the purchaser must have decided to make an option on the property and have notified HMRC of the Option to Tax before legal completion of the sale.

In the recent case, Nora Harris v HMRC (2015), it seems advice wasn’t taken.  Mrs Harris did submit an Option to Tax when she wanted to refurbish the property, but, when she sold the property with tenant to her daughter, the daughter didn’t submit an Option to Tax.  In fact, she simply charged VAT on rents, thinking the property was taxable and never submitted an Option to Tax to HMRC.  HMRC assessed Mrs Harris for the VAT due on the property value (£6,995)

The Tribunal noted that HMRC could have accepted that an Option to Tax had been made by the daughter, evidenced by the fact she was charging rent. This would mean that the daughter could recover the VAT. But, importantly, the TOGC rules could not apply as she had not notified HMRC by the deadline of completion.

Whilst this might seem academic, as there is no loss of tax to HMRC, it is important because the purchaser will have to find the money to pay the VAT on the purchase.  More importantly Stamp Duty Land Tax (SDLT) is charged on the purchase price and VAT.  So SDLT will be payable on the VAT charged, and, if the VAT pushes the price into the next SDLT bracket it could considerably increase the overall SDLT payable.

VAT on property is a very complex subject. Even seemingly simple transactions can produce unexpected results for VAT.  It is vital the VAT is considered on every property transaction to avoid expensive problems. We would recommend that professional advice before a property is bought or sold to establish the correct VAT position.”