VAT should be paid on the sale of a commercial property if the seller has made an option to tax with the Revenue. Paying VAT on a commercial property can be a substantial burden to purchasers and although most purchasers will be VAT registered (and will be able to claim the VAT back at a later date), paying VAT on top of the purchase price can cause disruption to a purchaser’s cash flow and its budgets.
However, following the decision by the Tax Tribunal in The Royal College of Paediatricians and Child Health & Coleridge (Theobald’s Road) Limited v HMRC (2013), it is now clear that VAT will not be payable where a property is transferred as a going concern (a TOGC). If a property is either (1) transferred as part of the sale of a business or (2) a business in its own right, for example, an investment business where the property generates a rental income, no VAT should be charged on the sale.
In this case, the College wished to purchase a commercial property which was owned by Coleridge Limited. The property had been opted to tax and had recently been refurbished, with a view to it being let out after the refurbishment.
The College was a registered charity and as such would not have been able to reclaim the VAT payable on the property. In the College’s existing property, various leases were in place, in particular, leases to two organisations who had expressed an interest in moving to Coleridge’s property with the College. One of the organisations therefore entered into an agreement for lease (i.e. an agreement to enter into a lease at a later date) with Coleridge. Coleridge subsequently sold the freehold to the College with the benefit of the agreement for lease and the parties treated the sale as a TOGC.
The Revenue challenged the treatment of the sale as a TOGC even though its guidance states that “where tenants have not actually signed the lease, provided there is a signed agreement for lease or a contract for a lease that is also transferred and evidenced in the contract, the transfer could be a TOGC”. The Tribunal rejected the appeal from the Revenue on the basis that there was clearly a property letting business which was capable of being transferred as a going concern.
From our experience, we know this decision will be welcomed as we are frequently asked whether a property subject to an agreement for lease can be treated as a TOGC. While we cannot say for sure that it will be (every case will be treated on its merits), the Tribunal’s recent decision is a step in the right direction. However we do not think that this will be the end of the matter. The decision by the Tribunal could potentially see a significant decrease in the amount of VAT and Stamp Duty Land Tax paid by purchasers and we cannot see the Revenue taking this lying down!
For further information on this topic or for those interested in tax and commercial property, the following article by Graham Brearley is an interesting read:
Beverley Merrell is a Director at BHW Solicitors in Leicester and regularly writes on commercial property issues. Beverley can be contacted on 0116 281 6221 or by email at firstname.lastname@example.org.