Richard Croker reviews recent developments in HM Customs and
Excise's practice
VAT law and (more particularly) practice continues
to develop in relation to this crucial area. Many property sales
involving occupational leasehold interests are either
straightforward transfers of going concerns (TOGCs), or capable of
being structured as such with a little imagination. Basically, a
TOGC is a sale of an otherwise VATable (usually tenanted) property
on which no VAT needs to be charged as long as the buyer carries on
the (letting) business previously carried on by the seller. HM
Customs & Excise generally take the view that TOGCs are a good
thing and encourage them as the authorities are not then exposed to
the risk of a seller's failure to account for VAT due to insolvency
or fraud. A TOGC helps a buyer with his cashflow and in reducing
the now draconian stamp duty liability. For a seller, however, the
exposure to a possible assessment for VAT if the sale is treated as
a TOGC in error is of great concern. Customs are now refusing to
give clearances in straightforward cases - probably to reduce their
routine workload but also possibly to forestall avoidance in
certain areas - with the result that sellers of property cannot get
the reassurance of a ruling prior to sale, except where the facts
are unusual. What are the consequences of this, and has anything
really changed?
Sub-sales and other dastardly deeds
Sellers have expressed concern about the ability of
buyers to default in their obligations to "carry on the business"
as required to preserve TOGC status. What if they buy out the
interest of the occupational tenant on or after completion, or
require a sub-sale, or immediately following completion transfer
title again to a third party? Here, the seller has to rely on his
contractual rights against the buyer unless he wants to take a
deposit of an amount equal to VAT pending clearance. In routine
investment sales the buyer will be able to resist this. A ruling
from Customs would not help - it would only ever be on the basis of
facts disclosed and the events contemplated probably would not be
anticipated at the time of the application. There has always been a
residual risk with TOGCs and the new policy on rulings has not
changed that - sellers have to verify the position as much as
possible and will usually rely on warranties and indemnities.
Intra-group sales/leases
One area which has developed recently is the
treatment of VAT grouping arrangements and TOGCs.
If there is a pre or post sale reorganisation by a
seller or a buyer involving the transfer of a property between
members of a VAT group, this will not on its own jeopardise a
TOGC.
Customs may be prepared to treat the sale of a
property let to a VAT group member of the seller, or the buyer, as
a TOGC even though no supply is made of the property under the
lease for VAT purposes between group members. Both these helpful
concessions deserve publication in the applicable VAT notice, as a
cautious seller will be reluctant to rely on the present position.
In such cases, a ruling is advisable and probably obtainable!
Costs
The position on attributable costs has stabilised
recently (although the Abbey National tribunal decision on
attribution of a seller's costs of an investment sale is going to
appeal) - costs will be residual whether you are a seller or buyer
- unless your partial exemption method says otherwise!
Nominee arrangements
Sellers should beware where a sale is made to
someone other than the beneficial owner (for instance, a nominee
buyer). If Customs' Business Brief 10/96 applies, secure the
requisite contractual agreement - if it does not, obtain an
appropriate warranty.
Remember - Customs' practice continually evolves
and is not always widely publicised!