22 March 2019 - Article
HMRC’s changed position
Revenue and Customs Brief 30/12 details a change of HMRC policy in the wake of the decision in Robinson Family Limited (TC2046). This relates to the ostensible requirement for a seller to transfer all of his interest in any given property in order for the property transfer to be covered by the TOGC rules. This case established that this criterion was unnecessary. Robinson Family Limited granted a sublease, for a premium, for a period just three days shorter than the remaining time of their lease. The Tribunal regarded this as sufficient to have transferred the asset as part of the business.
HMRC has decided not to appeal, and will accept that the effective transfer of the asset can be regarded as a TOGC even if a small proportion of the interest is retained, such as in the granting of a lease from a freehold, or the granting of a sublease from a lease. For the time being they appear to restrict this treatment to property investment businesses rather than situations where the property is used in a wider business activity. Nor do they accept that this includes surrenders of interests to landlords. Both points are being reviewed. It is difficult to see how the exclusions currently in place for surrenders of interests, or for properties used in wider businesses, can logically be sustained, and these too, will probably be accepted as falling under TOGC treatment in due course, though since the Brief was issued nearly four months ago, and no further information has been received on this aspect, it appears to be giving them some difficulty and gives the impression of them ‘playing for time’.
In order for the new policy to apply, HMRC sets a general benchmark whereby the grant of the interest must extract more than 99% of the commercial value of the original interest held by the transferor in order for the transfer to be considered sufficient to be part of a going concern transfer. There is nothing in legislation or the tribunal decision which reflects this benchmark. It is an arbitrary limit, seemingly imposed by HMRC. They say they will regard the retention of any greater value as giving rise to ‘too complex’ an activity to be certain to be a TOGC.
The 1% value criterion includes the value of the reversionary interest and the potential for generating ground rents. In an illustration of how this value might be determined (but restricted only to ground rents) HMRC implies that a multiple of twenty of the annual ground rent gives the value of the retained interest for the purposes of the comparison with the former interest. However, it does not go as far as to say that that method is binding on HMRC. It may be prudent in high value property cases to ensure that a surveyor’s professional advice on the retained value is obtained to show to HMRC in the event of any dispute. Otherwise it is hoped that smaller scale transactions can be dealt with on a common sense basis. It is almost certain, however, that there will be a legal challenge to this 1% limit in due course.
An aspect which has not been settled, but has been acknowledged as outstanding, is that of the SDLT which will have been paid by the purchaser on any transaction which wrongly failed the original TOGC test. Whilst HMRC are happy to accept claims in respect of over-declared VAT arising on the basis of this HMRC error of interpretation, they have not confirmed that they will reimburse the SDLT to the purchaser. It is hard to see any reason that this should be denied, although SDLT error correction rules could create a difficulty for them. A question will be whether HMRC agrees that the SDLT can be reduced where the seller has charged VAT but the purchaser has successfully reclaimed it, and where they thus have no incentive to rectify the incorrect VAT accounting. If not, then all transactions which could have been treated as a TOGC may have to be ‘opened’ between the purchaser and the vendor, creating considerable inconvenience.
HMRC accepts that the declarations required to be made before transfer will be waived in cases where the parties wish to rectify past overpayment of VAT, as long as the conditions under the declarations were satisfied at the time. Claims will be accepted on that basis.
If you would like to discuss this please contact Graham Elliott on +44 (0)20 7597 6112 or by e-mail firstname.lastname@example.org.