HMRC have now provided further guidance on when the grant of a lease can be a transfer of a business as a going concern (“TOGC”), which is not a supply for VAT purposes. HMRC’s previous guidance explained that the grant of a lease could be a TOGC provided that the lessor’s retained interest had a value of no more than 1% of the value of the property immediately before the transfer. HMRC have now explained that this 1% test only applies to the part of the building which is being let. Accordingly, for example, the grant of a long lease of one floor of an office block will be capable of being a TOGC provided that the value of the interest retained by the lessor in that floor is no more than 1% of the value of the lessor’s interest in that floor immediately prior to the grant of the lease.
HMRC’s announcement also confirms that the surrender of a lease is capable of being a TOGC provided the landlord will carry on the same business as the tenant and the other TOGC conditions are satisfied. These recent policy changes in relation to leases and surrenders apply not only to properties subject to tenancies but also to businesses which are not property rental businesses.
As explained in further detail in our previous blog, following the First-tier Tribunal decision in Robinson Family Limited v HMRC  UK FTT 360 (TC) HMRC issued Revenue & Customs Brief 30/12 confirming that TOGC treatment will be capable of applying to the grant of a long lease of property which is subject to an occupational lease. Whilst not specifically set out in the Robinson Family case, HMRC’s guidance included a condition that the lessor’s retained interest had a value of no more than 1% of the value of the property (disregarding any mortgage or charge) immediately before the transfer (“the 1% test”).
HMRC’s guidance did not consider whether, in situations where the long lease is over part of a building (e.g. a floor of an office building), the interest to be compared before and after the grant of the lease for the purposes of the 1% test should be the whole building or only the element which is subject to the new lease.
The Tribunal’s approach in the Robinson Family case also cast doubt on HMRC’s position that the surrender of a lease could not be a TOGC. HMRC explained in Revenue & Customs Brief 30/12 that it was reconsidering whether the surrender of a lease subject to existing tenancies is capable of being a TOGC.
Long leases of part of a property
HMRC have now confirmed in Revenue & Customs Brief 27/14 that the 1% test only applies to the part of the building that is being let. Accordingly, for example, the grant of a long lease of one floor of an office block will be capable of being a TOGC provided that the value of the interest retained by the lessor in that floor is no more than 1% of the value of the lessor’s interest in that particular floor immediately prior to the grant of the lease.
Change of policy in relation to surrenders
Revenue & Customs Brief 27/14 also states that HMRC have now concluded that the surrender of a lease is capable of being a TOGC.
The change in policy will give rise to the opportunity for taxpayers to make claims for repayment of VAT, subject to the usual time limits and unjust enrichment rules. HMRC confirms that it will not reject repayment claims on the technical basis that the transferee (the landlord) did not give the transferor (the tenant) the required notification that Article 5(2B) did not disapply its option to tax (Article 5(2B) disapplies an option to tax in certain circumstances). The parties would not generally have included such a notification in the contract if they did not expect to qualify for TOGC treatment. HMRC will accept that this requirement is satisfied provided Article 5(2B) did not apply and so the requisite notification could have been given.
Landlords who have suffered VAT on surrenders which in retrospect were eligible for TOGC treatment will generally require the co-operation of the tenant to recover the VAT, so should review the terms of the transaction documents to check their rights.
Tenants who have suffered irrecoverable input VAT on transaction costs or other expenditure on the basis that a surrender was treated as an exempt supply, may now be able to recover the input tax from HMRC on the basis the transaction should have been treated as a TOGC.
Where VAT has been incorrectly charged, this may have resulted in an overpayment of SDLT as SDLT is paid on the price including any VAT. Where there is a refund of the VAT by the tenant to the landlord, the tenant may be able to recover the overpaid SDLT provided a claim is made within four years of the date of the transaction.
Application to businesses other than property rental businesses
HMRC’s latest guidance also confirms that the change of policy following the Robinson Family case also applies to a lease granted or surrendered as part of the transfer of a business which is not a property rental business. HMRC give the example of a retailer selling its retail business but disposing of its premises by granting a lease to the buyer rather than transferring the freehold or assigning its leasehold interest.
Person constructing status
The Revenue & Customs Brief also notes that HMRC will now regard ‘person constructing’ status as passing to the buyer where there is a TOGC transfer of newly completed residential or charitable building. Given that the grant of a lease can now be a TOGC, residential developers will need to consider whether the grant of a long lease over the whole of a new residential development should be a TOGC with person constructing status passing to the tenant, rather than being a zero rated first grant by the developer.