Surrender of a property lease
HMRC has changed its policy on whether a surrender of a property lease can be treated as a VAT-free Transfer of a Going Concern (TOGC). Subject to certain conditions, a TOGC occurs when assets which form part of a business are transferred as a going concern. One of the main conditions is that the buyer uses any assets in a purchase of the same kind of business.
The situation for a surrender of a lease can occur when:
- an occupier sells a business including the trading premises
- a landlord sells a property subject to tenancies
- in some cases where a developer sells a development that is currently in progress.
HMRC has always accepted that an assignment situation, where a seller is a tenant and assigns the lease to the buyer who becomes the new tenant, will qualify as a TOGC subject to the other conditions.
The point of dispute was when a tenant surrenders a lease and the buyer is a landlord: the lease will normally ‘merge’ with the landlord’s interest in the land and in essence cease to exist. HMRC has never agreed that this situation could be a TOGC as the same asset is not used in the business.
The Robinson decision held that the grant of a lease could be a TOGC, and to decide ‘one must look to the substance of the transaction rather than its form’.
HMRC accepted the granting of a lease could be a TOGC and publicly stated in Revenue & Customs Brief 30/12, in regard to surrendering a lease. HMRC has been reviewing its position, hence the release of Revenue & Customs Brief 27/14.
HMRC has now accepted, subject to the normal conditions, that surrendering a lease could be a TOGC. For example:
‘Where a tenant subletting premises for its business decides to surrender its interest in the property together with the sublet tenant, subject to the other conditions this could be a TOGC.’
‘A retailer sells its retailing business to its landlord, again subject to the other conditions this could be a TOGC.’
HMRC is in the process of amending its guidance to reflect this change of policy and is allowing businesses to delay the implementation of the changes by four weeks, starting on 9 July 2014. The problems arise retrospectively, for VAT where output tax was charged on a sale which would now be seen as a TOGC or input was restricted as the surrender was seen as an exempt supply. And for Stamp Duty Land Tax (SDLT) which is always charged on the VAT inclusive.
Providing certain legal requirements are met and the normal time limits are adhered to there is a possibility to claim back over-paid output tax or under-claimed input. For details on how to claim please refer to VAT Notice 700/45 ‘How to correct VAT errors and make adjustments or claims’.
The time limit for claiming any overpaid SDLT is four years from the date of the transaction, and any claim must be made under Schedule 10, paragraph 34, Finance Act 2003. Further details can be found in HMRC’s manuals:
- SDLTM52500, and
- SDLTM5400.
HMRC will not refund SDLT unless the overpaid VAT has also been refunded.
Clarification of policy change
Revenue & Customs Brief 30/12 looked at a grant of a lease only in reference to property rental businesses; HMRC has now changed its view and believes that there is a wider implication. After reviewing it further HMRC believes that this change in policy can apply to properties used in a business other than a property letting.
Clarification of HMRC’s change of policy
When HMRC issued its original guidance in Revenue & Customs Brief 30/12 it only made reference to a property rental business. HMRC has been reviewing its guidance and interpretation and has now concluded that the guidance applies generally and is not confined to a property rental business. This can therefore apply when a retailer disposes of a retail business and transfers premises by granting a lease. HMRC also agrees that where the same applies for a surrender, it applies generally.
For example:
‘A Ltd owns the freehold of a four-storey building, valued at £4m, which A Ltd rents out commercially. The freehold in each floor is worth £1m. A Ltd sells its property rental business in one of the floors by granting to B Ltd a 999 year lease of that floor, under which A Ltd is entitled to receive a ground rent of £100 each year. The value of that right, together with any and all other rights retained by A Ltd in that floor, is £2,000.’
‘A Ltd has retained 0.2% of the value of its interest in the one floor, and 75.2% of the value of its interest in the building as a whole. The 1% figure mentioned in Revenue & Customs Brief 30/12 is to be considered in relation to the one floor alone. Provided all the normal conditions are satisfied, the transaction will be a TOGC, because HMRC will regard the 0.2% interest retained as too small to disturb the substance of the transaction.’
Revised guidance on TOGC for new dwellings, relevant residential and relevant charitable
When a new residential or relevant charitable building is sold by a ‘person constructing’ as either a freehold or a long lease, in most circumstances it would be a zero rated supply. HMRC had always considered the ‘person constructing’ status is not transferred on a completed building in a TOGC situation. HMRC now believes this is contrary to EU Principle of Fiscal Neutrality.
HMRC now accepts:
‘A person acquiring a completed residential or charitable development as part of a transfer of a going concern inherits the “person constructing” status…’
This would mean that zero rating could be achieved subject to certain conditions by the onward sale by the purchaser under TOGC. This change in policy also applies to ‘person converting’ and ‘person substantially reconstructing’; however, the ‘change of use provisions’ would still need to be considered.
HMRC is inviting retrospective claims if this change of policy has affected you.
(article by ACCA)