22 March 2019 - Article
HMRC has revisited its policy on property assets transferred as going concerns (‘*TOGC*s’) in R&C Brief 27/14. This is a follow up on Brief 30/12, which was issued a full 18 months ago, and promised to revisit the issue. It is difficult to discern why it has taken 18 months to review the relatively simple points which the Brief covers.
In summary, the rule which allows TOGC treatment where the grant does not involve outright sale, but rather, the seller retains a vestigial interest in the property, is to be extended to ‘trading premises’ of businesses other than a property rental businesses. This will cover industrial units, retail premises, and offices, which are used by businesses which are sold together with these premises. HMRC originally seemed unwilling to allow this unless the property generated rent. But there was never any reason given as to why the two classes of use should be regarded in a different light, and the latest Brief does not explain why there was a doubt.
HMRC now invites claims where VAT has been overcharged to the detriment of the parties. Perhaps they wanted to delay these claims by 18 months to improve the public finances.
The same Brief enlightens us on whether a surrender of an interest in an investment property can be a TOGC. This point was also held over from Brief 30/12. This can arise where a head lessee (say) wishes to surrender his interest to the freeholder. The freeholder receives the benefit of all of the sub-leases together with the lease. HMRC has now announced that this transfer is a TOGC, since it effectively transfers a property rental business. Where was the doubt in that? We are told the doubt was because the surrendered interest merges immediately into the superior interest, so the asset has not in effect been received by the freeholder. This ignored the fact that the asset was transferred. So, we have now been told that such transactions are TOGCs, which seems obvious.
The Brief repays further reading on some more technical areas, and in particular, the way in which the changed policy on VAT and transfers of properties can impact on the SDLT liability.
HMRC has also been trying to challenge input tax recovery by property businesses. This can arise in cases where the lessor of a taxed property also provides insurance for the tenant’s contents. The insurance element is exempt, which means that costs relating to the overall business may prove to be only partly recoverable. How one measures that recovery is therefore a critical aspect.
The case of Lok’n‘Store, which provides storage services and related insurance, shows how willing HMRC is to try to depress the level of VAT recovery below what would seem sensible to a management accountant. The taxpayer acknowledged that a storage facility normally gave rise to both taxable storage supplies and exempt insurance supplies. It argued that, in effect, only the administrative offices and the front desk, were related to the insurance. The main part of the building, which physically housed the goods that were being stored, only had a relationship with the generation of taxable supplies.
HMRC required that all of the costs of constructing the building would be apportioned in the ratio of the value of taxable supplies to the value of both taxable and exempt supplies. The taxpayer argued that the building construction and maintenance costs should be apportioned first by reference to the floor area dedicated to storage, and then the remaining construction and maintenance VAT costs would be apportioned according to relative turnover achieved by the two kinds of supplies. HMRC is litigating this point, and so far two tribunals have found against HMRC and in favour of the area based cost allocation approach. We wait to see if HMRC decides to soldier on with its rather basic view of cost allocation, and to attempt yet another appeal.