16 Nov 2015

Purchase of rental businesses: don’t trip up on TOGC

BKL Briefing, Insights, Publications

When buying a property rental business, ensuring that the transaction is treated as a transfer of a going concern (TOGC) for VAT purposes is important. Although VAT will normally be recoverable, so that the VAT is “only” a cash-flow cost, remember that Stamp Duty Land Tax is chargeable on the VAT-inclusive consideration – so failure to secure TOGC treatment will create an additional permanent SDLT cost of, typically, 0.8% (i.e., 20% x 4%) of the consideration – or even more if residential property is involved.

Under a strict reading of the VAT law, TOGC treatment requires that the purchaser is liable to be registered for VAT or is actually registered for VAT and has a VAT number to hand on the day of completion of the purchase. Therefore where a property rental business has an annual rent roll under the compulsory VAT registration threshold of £82,000 per year, the purchaser is not liable to be registered for VAT and so it is essential to submit the VAT registration forms before completion (assuming deposit is held as stakeholder). Historically, HMRC officers have usually taken the view that provided the relevant forms have been submitted to HMRC before completion (so that any failure to be actually registered at the relevant time is down to HMRC’s delay in processing them) TOGC treatment is available provided the effective date of VAT registration (when it comes) is on or before the completion date.

However, we have become aware that recently HMRC have been looking very closely at when the VAT registration and related forms were submitted and when the VAT number was physically issued. If these dates are not “correct” (for example if the VAT number was issued after completion), they have in some cases been seeking to deny TOGC treatment and to issue assessments. We don’t yet know if this is official policy or the odd officer off on a “frolic of his own”; but it reminds us that buyers must submit their VAT registrations as soon as possible and consider asking for extensions to completion dates if the VAT number is not through and HMRC have not agreed in writing that TOGC treatment will nonetheless apply.