If you’re buying a property on which the option to tax has been exercised, VAT will be added to the purchase price. That is a mere cashflow issue if you can recover the VAT as input tax. But since Stamp Duty Land Tax (‘SDLT’) is charged on consideration inclusive of VAT, the charging of VAT creates a real additional SDLT cost.
If, as in Haymarket Media Group Ltd v HMRC [2022] UKFTT 168 (TC), the price is the thick end of £100m, the additional SDLT cost is not insignificant and worth doing something about if you can.
The property in question had planning consent for demolition and redevelopment. It had previously been let, but the Heads of Terms specified that it was to be sold with vacant possession. To avoid VAT (and, more importantly, SDLT on VAT) the buyers mooted the possibility of contriving that the sale might be structured as a ‘Transfer of a Going Concern’ (which is outside the scope of VAT). The vendors were happy to co-operate and a new lease with the buyer’s advisers was duly entered into, covering a small part of the site for a trivial rent; and VAT and SDLT returns were filed on the basis that what had been sold was a property lettings business.
Perhaps unsurprisingly, the Cunning Plan failed. The Tribunal considered that ‘the critical feature of the special relationship between the putative tenants and the purchaser is fatal to the argument that there could have been a TOGC as a property lettings business’ and concluded that ‘on the date of completion, neither Dartmouth nor SDL was in substance true tenants of a property lettings business being carried on by Haymarket. Consequently, there was no property lettings business being transferred as a TOGC.’
Interestingly, despite having founded the TOGC planning on the creation of a property lettings business (or at least the appearance of one), that was only the secondary backup argument put before the Tribunal. In a midstream change of horses (never without hazard) the principal argument made was that the vendor had transferred not a property lettings business but a property development business.
The purchaser plainly intended to carry on a property development business with the assets purchased. The crucial question was whether the vendor had been carrying on such a business. And the Tribunal thought it fairly plain that it wasn’t.
When we consider the steps taken by Haymarket, from obtaining the planning consent for the Site, all the way to procuring the letters of appointment and warranties from its planning consultants prior to launching the Property onto the market, it cannot be fairly or meaningfully said that these steps amounted to being an economic activity of a property development business which was carried on as a going concern. The ‘vital’ factor that the land was in the course of ‘active development’ was completely absent at the point of exchange of contracts.
There was thus no TOGC on that basis either, and VAT was due.
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