A timely reminder of the requirements of the transfer of a going concern rules for VAT on transfer of a property

The First Tier Tax Tribunal (FTT)'s recent decision in Haymarket Media Group Ltd v HMRC [2022] UKFTT 168 (TC) has emphasised the need for genuine compliance with the VAT rules when a transfer of a property interest is purported to take effect as a transfer of a going concern (TOGC).   

Facts:

A seller had opted to tax a freehold property and was seeking to sell this to the buyer. The property was subject to two occupational leases, both of which were terminated before the sale. The first lease was to an unconnected third party involved in film production, and the second was to a company in the same group as the seller. 
 
The buyer was intending to develop the property after acquisition (and the seller was selling the property with the benefit of planning permission). In order to secure TOGC treatment, the parties agreed to enter new leases over a part of the site shortly before the sale. Therefore, at the point of the sale of the freehold, the freehold was subject to the following leases:
 
a) a lease of part from the seller to the buyer's property advisor; and
b) a lease of part from the seller to the buyer's demolition contractor.  
 
The intention of the arrangement was that the seller would be effectively transferring a property letting business. It was notable that the rent under the first lease was reimbursed by the buyer, while the demolition contractor under the second lease required access to the site in order to commence buyer works.  

Decision: 

The seller's argument in the FTT was that it was carrying on both a property development and a property lettings business, and that both of these were transferred to the buyer as a going concern. The FTT found that there was no TOGC, and that as a result VAT was due on the sale price of the property.  
 
The seller could not have been carrying on a property development business because the commercial reality was that the buyer wanted to be in sole charge of a fresh development project from completion; in this case the buyer was not taking over a development project that had been started by the seller. Indeed the FTT noted that the seller's intention as to development only got as far as securing planning permission for development (which made the property much more valuable), while the parties' agreement specifically forbade the seller from implementing any development since this was to be the preserve of the buyer. 
 
There was also no TOGC of a property lettings business since the buyer and seller understood and intended that what was being sold was a freehold title with vacant possession, and the new leases were in place purely to structure the transaction as a TOGC.

Significance:

The FTT’s analysis placed great emphasis on the importance of substance over form and the commercial reality of the arrangements, though there was no suggestion from HMRC that the transactions were abusive. In particular, the commercial reality as to there not being a property letting business in place was also borne out in the FTT's conclusion that the buyer did not really want a true tenancy in place which it would inherit. Indeed, that it had picked its own property adviser and demolition contractor to be nominal tenants under the leases suggested that it was desirous of having a pliable connected party as a tenant which would not impede the key feature of the transaction, being the vacant possession of the title.
 
As a fully taxable business, the buyer was able to recover all of the VAT chargeable on the transfer, though it should be remembered as a cautionary tale that the VAT chargeable also increased the stamp duty land tax payable on the acquisition.