Land, buildings & VAT: what buyers need to know about TOGC

If you're buying property as part of a business deal, you might be able to avoid paying VAT, but only if the sale counts as a Transfer of a Going Concern (TOGC). This guide explains what that means, when it applies, and what you need to do to get it right. 

Why was the transfer of a going concern introduced?

To prevent VAT loss when a seller disappears post-sale, HMRC introduced special rules which apply when a business is Transferred as a Going Concern (TOGC). Where a transaction qualifies as a TOGC, it is not treated as a supply for VAT purposes.

TOGC rules are mandatory; from the outset, sellers and buyers must assess whether the sale meets the conditions for a TOGC. Even if a transaction would normally be exempt or zero-rated, it can still be treated as a TOGC if the conditions are satisfied.

Conditions for TOGC

For the sale of a business to be a TOGC for VAT purposes, all of the following must apply:

• The assets (i.e., stock-in-trade, machinery, goodwill, premises, and fixtures and fittings) must be sold as part of the TOGC
• The buyer must use the assets to carry 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 own 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 a result of the transfer.
• 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.

Transfers involving land and property

Where land and property are involved, additional conditions apply. To qualify as a TOGC for VAT purposes, the transaction must otherwise be taxable. There are requirements that the seller and buyer must fulfil.

The seller must:

• Have opted to tax the land or buildings being transferred.
• Ensure the option is not disapplied at the time of transfer.

The buyer must:

• Have opted to tax the property.
• Notify HMRC of the option and confirm to the seller (in writing) that the option will not be disapplied under anti-avoidance provisions (VATA 1994, Sch. 10, para. 12).

You should note that if you are transferring the freehold of a new building (less than three years old), the sale would normally be subject to VAT but may qualify as a TOGC if other conditions are met.

What are the seller's responsibilities for the option to tax?

The seller is responsible for applying the correct VAT treatment. They must ensure that the buyer’s option to tax is in place by the relevant date. To do so, they may request:

• A copy of the buyer’s notification to HMRC confirming their option to tax.
• Written confirmation from the buyer that the option has not been disapplied.

Auctioned properties and potential pitfalls with the option to tax

The buyer must opt to tax the property and notify HMRC before contracts are exchanged. This requirement sometimes catches buyers off guard, particularly in auction scenarios. The buyer may not know which properties they will acquire until the auction concludes.

If you are considering purchasing properties at auction, you may choose to opt to tax all properties you might be interested in that could qualify as a TOGC. If you do not proceed with the purchase, the option to tax can be withdrawn within six months, or it will automatically lapse after six years.

Disapplication of the buyer’s option to tax

An option to tax can be disapplied under anti-avoidance rules. If disapplied, the option ceases to have effect for the transfer of land and buildings. These rules apply where the land or buildings are used for purposes other than fully taxable business activities, or where the property is a capital item under the Capital Goods Scheme.

Unless the option to tax is otherwise disapplied, freehold transfers of new buildings and civil engineering works (less than three years old), as well as land and buildings on which the seller has exercised an option to tax, can only be treated as a TOGC if the buyer:

• has both opted to tax the property and notified HMRC by the relevant date, and
• provides a written declaration to the seller confirming that their option will not be disapplied under the anti-avoidance provisions.

If the buyer fails to meet either of these conditions, the property transfer will not qualify as a TOGC. It will then be subject to VAT. However, the transfer of other business assets may still qualify to be treated as a TOGC.

TOGC and leases

Lease agreements may allow a building to be treated as a TOGC even when a tenant isn’t present in the building. Specialist advice should be taken in these cases to ensure you have the best chance of securing a TOGC.

Until recently, HMRC took a very strict view of how property law and TOGC rules sat together. They would argue that where a tenant surrendered an old lease and entered into a new one with the new landlord, the TOGC rules could not apply.

Several recent VAT Tribunal cases have forced HMRC to take a more relaxed attitude. However, great care should be taken in any case involving leased property.

Any property transaction will potentially involve significant amounts of VAT. Therefore, specialist VAT advice is always recommended before any sale or purchase to ensure you have maximised your VAT position.

Get your TOGC property questions answered

VAT remains one of the least understood of all taxes, which is why we set up a specialist VAT advisory department to help guide businesses through the complex maze of VAT legislation.  

Our team help with all areas of VAT from relatively basic issues such as initial registration, the completion and submission of VAT returns and advice on how to correct errors and mistakes, through to more complex issues such as assessments, control visits, cross border transactions and DIY house builds.  Whatever your VAT query, why not get in touch, and discuss any queries you may have with a member of our team.