VAT when buying or selling a property business; what is TOGC?

Most business owners know that if they sell their business the sale will be free from VAT, but sometimes they don’t understand the reason why.

To prevent a loss of VAT when a seller disappears after a sale, HMRC introduced some special rules, known as “transfer of a business as a going concern”, often shortened to TOGC. Whenever a transaction is treated for VAT purposes as a TOGC, there is no supply, neither taxable nor exempt. This treatment depends upon a number of conditions being met. Assets transferred must be used in the same kind of business after the transfer as before; the acquirer must be VAT-registered already or become VAT-registered as a result of the TOGC; straightforward so far.

This all gets more complex where property is involved, especially if the property is a new commercial building or the transferor has opted to tax the building.

If a landlord is selling an opted property with an existing tenant HMRC will allow the supply to be treated as a TOGC provided certain additional rules are met. The main additional rule is that the purchaser must opt to tax the property and notify HMRC of the option before contracts are exchanged.

This can catch out some purchasers who exchange contracts without notifying HMRC.  It can be a real problem where purchases are made by auction and the purchaser might not know which properties they will walk away with when the hammer falls.

If you are thinking of buying properties at auction you can opt to tax all the properties you might be interested in that could be a TOGC.  If you don’t buy the property you can withdraw the option within 6 months or it will lapse automatically after 6 years.

HMRC often have trouble understanding property ownership and letting, particularly where agreements for lease are in place.  These can allow a building to be treated as a TOGC even where a tenant isn’t actually in the building.  Specialist advice needs to 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 the property law and the TOGC rules sat together. They would always 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.  A couple of recent VAT Tribunal cases have forced HMRC to take a more relaxed attitude, but again, great care needs taking in any case involving leased property.

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

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.

• What is VAT? - A guide to Value Added Tax
• VAT when buying or selling a property business