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Transfer of a going concern

Revenue & Customs issue Business Brief following Robinson Family Limited case

As a result of the Tax Tribunal case of Robinson Family Limited (RFL)1 Revenue & Customs have issued a new business brief which revises their practice in relation to transfer of a business as a going concern (“TOGC”).

The Business Brief notes that RFL is: “A property development company which purchased a 125 year interest in a site owned by Belfast Harbour Commissioners, which it intended to develop into six units and grant sub-leases of these to third parties.”

The dispute between RFL and HMRC in the end concerned one unit which RFL had been negotiating to let. There was a restriction imposed by Belfast Harbour Commissioners against any sub-division of the site other than by way of the creation of sub-leases, so rather than sell its interest, RFL granted an interest of 125 years less three days to a purchaser, subject to and with the benefit of the proposed letting.

HMRC relied solely on the argument that RFL could not have transferred all or part of its business as a going concern, because it did not assign the full term of its lease to the purchaser. HMRC’s approach in the case reflected the guidance set out in the second bullet point in paragraph 6.3 of Notice 700/9 (April 2008), ‘transfer of business as a going concern’ which stated:
“If you own the freehold of a property and grant a lease, even a 999-year lease, you are not transferring a business as a going concern. You are creating a new asset (the lease) and selling it while retaining your original asset (the freehold). This is true regardless of the length of the lease. Similarly, if you own a head lease and grant a sub-lease you are not transferring your business as a going concern.”

Although RFL retained the head lease, that distant interest in a three day reversion and the small economic interest which it represented in no way altered the substance of the transaction. The substance of the transaction was to put the transferee business in a position where it was able to continue the previous lettings business of RFL. On this basis, the Tribunal found against HMRC.
When the assets of a business (or part of a business) are transferred as a going concern, subject to certain conditions no supply of those assets takes place for VAT purposes provided that the purchaser has the intention of using those assets to carry on the same kind of business as the seller. This also applies where the business is that of property development or property rental, and the asset sold is the property.

Following the Tax Tribunal case of Robinson Family Limited, the fact that the transferor of a property rental business retains a small reversionary interest in the property transferred does not prevent the transaction from being treated as a TOGC for VAT purposes. As long as the interest retained is small enough not to disturb the substance of the transaction, the transaction will be a TOGC if the usual conditions are satisfied. Revenue & Customs acknowledge that the creation of a new asset (a lease or sub-lease) and the retention of the original asset (the freehold or a superior lease) is not automatically incompatible with TOGC treatment.

Footnotes

([2012] UKFTT 360 (TC), TC02046)

(30/12)

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