Recent developments in HM Customs and Excise's practice

United Kingdom
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!