VAT : Transfer of Property as a Going Concern 2

The High Court have rejected the taxpayer's (the seller) appeal from the VAT and Duties Tribunal in Higher Education Statistics Agency Limited v Commissioners of Customs & Excise but for different reasons. The case deals with when the option to tax in relation to a tenanted property must be exercised by a purchaser in order for the sale to attract transfer of a going concern relief (TOGC relief).

A full summary of the case can be seen below: __________________________________________________

The case concerned the application of TOGC relief to a tenanted property acquired by the buyer at auction. The buyer successfully bid for the property and paid to the auctioneer "as agent for the vendor" a deposit of 10% of the price. The seller had opted to tax the property and prior to completion (some four weeks later) but after exchange the buyer opted to tax the property, notifying Customs & Excise.

Whilst the seller put several arguments to the court, some of which rested on EU law, the crux of the case concerned the meaning of "relevant date". Article 5 of the Value Added Tax (Special Provisions) Order 1995 specifies the conditions that need to be satisfied if TOGC relief is to be available. In particular, TOGC relief is available only if the purchaser opts to tax and gives written notification of this to Customs & Excise no later than the "relevant date". Article 5(3) defines the "relevant date" as "the date upon which the grant would have been treated as having been made or, if there is more than one such date, the earliest of them."

In order to understand the implications of the different reasons of the VAT tribunal and the High Court, it is necessary to understand the VAT position when a deposit is paid to the seller of land where TOGC relief does not apply and the price is subject to VAT. If the deposit is paid to the seller's agent (eg solicitor) as stakeholder, VAT is not chargeable on the deposit until it is released to the seller (normally at completion). If it is paid to the seller's solicitor as agent for the seller, VAT is chargeable on the deposit at exchange.

Reasoning of the VAT tribunal

The VAT tribunal concluded that "grant" was not the same as "supply" and that grant was to be equated with the grant of an interest in land. Because the buyer obtains an interest in land on exchange of contracts, a grant is made on exchange so that the option to tax must be exercised on or before the date of exchange. This is the case even if the deposit is paid to the auctioneer as stakeholder.

High Court reasoning

The High Court held that there is no distinction in Article 5(3) between "supply" and "grant". Where the deposit is paid to the auctioneer as the seller's agent, this would be a "supply" but for the availability of TOGC relief and therefore unless the option to tax is made and notified to Customs & Excise on or before the date of auction, TOGC relief is not available. Accordingly, in this case TOGC relief was not available (confirming Customs & Excise's long held view).

If, however, the deposit is paid to the auctioneer as stakeholder, there is no grant and TOGC relief will be available provided that the option to tax is made and notified to Customs & Excise before a grant is made (normally completion).

Implications

1.The decision of the High Court confirms Customs & Excise's long standing practice as set out in Customs & Excise Notice 700/9 "Transfers of a Business as a Going Concern." The High Court decision dispels the concern that strictly, the option to tax must be made and notified to Customs & Excise before exchange of contracts even in non-auction sales.

2.The option to tax only needs to be made and notified to Customs & Excise on or before exchange where the deposit is paid to the seller's agent as "agent for the vendor". It is not necessary where the deposit is paid as stakeholder.

3.It now seems unlikely (subject to any appeal by the taxpayer) that Customs & Excise will need to amend Article 5(3). Customs & Excise are currently undertaking a review of the operation of the option to tax and this is one of the aspects that they have been looking at.

4.TOGC relief can be obtained by a seller even where the sale would not in any event attract VAT. This can be beneficial to a seller's input tax recovery position. It is not necessary for the buyer to opt to tax to obtain TOGC treatment in these circumstances and this case does not affect the position.

If you would like any further information, please contact Richard Croker on 020 7367 2149 ([email protected]) or Mike Boutell on 020 7367 2218 ([email protected]).