The VAT-efficient transfer of investment properties, either a single tenanted building or a property portfolio, can be complex and involved. If structured correctly, the arrangement can remove VAT from the selling/purchase price and reduce stamp duty land tax (SDLT) liabilities. This arrangement is known as the transfer of a going concern (TOGC).
Several conditions need to be met for an investment property being transferred to be regarded as a TOGC for VAT purposes. The key distinction is that what is being bought and sold is a “business” and not a tangible asset. Many conditions, guidelines and case law must be met for TOGC, and every situation is unique.
The most relevant conditions are as follows:
A TOGC falls outside the scope of VAT. From advising extensively in this area, we have seen a number of watchpoints. For example, where the transfer appears to meet the TOGC conditions listed above, but fails to qualify due to the execution of the transfer not being in line with all of the rules. As a result, the arrangement becomes a supply for VAT purposes. The ultimate risk lies with the vendor, as the vendor is the supplier, so that liability falls on them.
The most common problems that we have seen include:
We recently advised an investment fund on acquiring a commercial property portfolio from a group of companies carrying out a restructuring exercise. The group wanted to sell their freehold properties but to also remain in occupation under occupational leases. The agreed price was £60 million. The parties were mistakenly under the impression that the arrangements could be treated as a TOGC, so expected no VAT (and SDLT thereon) to be payable. We advised on the best way to restructure the arrangements, which still allowed both parties to achieve their objectives. This meant that VAT of £12 million was not payable, together with additional SDLT of £600,000.
TOGC is a complex area, with no two scenarios being the same. The key is to plan from the outset and be clear on whether the TOGC conditions are met. It is important to ensure that the necessary steps are taken by the appropriate party to ensure that the transfer is correctly treated and executed.
Instructing a VAT specialist with experience in TOGC will help you ensure that all conditions are met. Get in touch with our expert real estate VAT team if you would like to discuss TOGC or any other issue you face as an investor.