Land and property: Land and property - general
The transfer of land in the context of TOGC should be approached in the same way as other assets except that there are extra rules relating to categories of land and buildings that would be standard rated if supplied. These are discussed at VTOGC6100. This section provides guidance on TOGCs that involve land and property and the special rules that might apply to these transactions.
Further guidance on Land and Property can be found at VATLP. Notices 700/9 and 742A also give HMRC policy on this subject and contain tables that will help with the interpretation of the following guidance.
It can be difficult to distinguish the sale of an asset such as bare land, or a new or empty building from the sale of a property development or a property rental business (see also VTOGC3150). When an asset such as bare land, a new or empty building is sold it takes on its normal liability.
Article 9 of the Principal VAT Directive 2006/112 provides that ‘any activity of producers, traders or persons supplying services…shall be regarded as “economic activity”. The exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity’.
The ECJ case of Rompelman (C 268/83) demonstrates that a person may have purchased land as a preparatory act to further economic activity. It is accepted that such a person may then change their intention and sell the land. The question will then arise as to whether there was a sale of land or of a business. There needs to be established whether there was a business in the course of active development or whether any development had been abandoned and the business intention had ceased. The case of Golden Oak Partnership (LON/90/958Z) can be contrasted with that of Gulf Trading Management Ltd (LON/99/842).
Golden Oak was a case concerned with the transfer of one phase of a three phase property development. The tribunal was referred to the decision of the ECJ in Spijkers (JMA) v Gevroeders Benedik Abattoir CV (C 24/85). That case concerned the Business Transfer Directive 77/187 which aimed to ensure the continuity of existing employment relationships in the framework of an economic entity irrespective of change of owner. The decisive criteria were the existence of a transfer and whether the entity retained its identity. The headnote to that case resumes thus ‘To determine this, account must be taken of all the factual circumstances of the transaction, including the type of enterprise, the fate of tangible assets such as building and stock, the value of intangible assets (such as goodwill) at the date of transfer, whether the customer base is transferred, and the degree of similarity between activities before and after the transfer and the duration of any interruption in them. All of these elements, which are for the national court to assess, must be considered together as a single whole’).
The decision in the Golden Oak case was that there was a TOGC. The seller was a property development company and the purchaser company intended to continue the development started by the seller. The seller had carried out infrastructure works including the construction of a road and driveways, an electricity substation, a gas meter station, an underground sewerage pumping station and piping from the pumping station to the public sewers which meant that the land was in course of active development. The purchaser continued the construction work without any break.
In Dartford Borough Council (LON/06/993) the Council entered into a development agreement with a company ‘P’ to develop plots of land with a view that these would eventually be sold. The Council and P then entered into a conditional agreement for lease with a supermarket ‘S’, who were to construct a distribution warehouse and recycling plant on the plots. Leases were held in escrow conditional upon practical completion with the leases to start from that date.
In December 2005 the Council agreed to sell the freehold of the plots, subject to an agreement to lease to a company ‘GP’. The parties considered this transaction to be a TOGC. There was a warranty that GP would continue to let the property immediately after completion on the terms of the agreement for lease and not carry on a business that was different than when the plots had been managed by the Council.
At the time of the sale to GP there had been various types of preparatory work to the site, such as the relocation of wildlife and the provision of drainage etc.
In contrast, in Gulf Trading Management Ltd the seller’s only action taken in respect of the land was an inspection of the soil, drawings for planning permission submitted and putting up a fence around the plot. The land was not being actively developed when it was sold.
A person who has not made taxable supplies may still be in business for VAT purposes, following the principles of the Rompelman ECJ case (C-268/83). Although Rompelman concerned input tax, it established the principle that engaging in preparatory work prior to making taxable supplies was sufficient to be regarded as economic activity. Consequently such a business is capable of being transferred as a going concern. This was demonstrated in the *A.C.S. Hordern (MAN/91/31) *Tribunal case.
Hordern bought land and planted it as woodland with the intention of selling timber. He agreed a plan with the Forestry Commission and employed a manager to plant and maintain his site. He became registered as an intending business in order to reclaim the input tax on the costs incurred in starting up. It was not anticipated that any timber would be harvested, and taxable supplies made, for a least 5 years. However two years later he decided to sell the site. The purchaser agreed to continue with the plan that the Commission had approved and to retain the services of the manager. Using the Rompelman principles, the tribunal found that an intention to make taxable supplies = economic activity = going concern. Consequently the sale of the woodland was a TOGC and therefore not a supply for VAT purposes.
On the other hand the ECJ also said ‘However, that provision does not preclude the tax administration from requiring the declared intention to be supported by objective evidence such as proof that the premises which it is proposed to construct are specifically suited to commercial exploitation’.
This approach also has implications for the sale of property and property rental businesses. This is explored in greater depth at VTOGC7050 to VTOGC7300.
Land on which an agreement for lease with a future tenant exists at the time of its sale can be a TOGC. In the Dartford Borough Council decision the Court ruled that a business exists as a consequence of the binding nature of the agreement for lease.
HMRC has previously taken the view that ‘person constructing’ status does not move to a person acquiring a completed building that is transferred as a going concern - this position is published in our technical manual in VCONST03560. However, recent cases in this area have highlighted that such transactions could lead to inequality of VAT treatment that is contrary to the purpose of the zero rate and could be in breach of the EU Principle of Fiscal Neutrality.
Having reviewed the position, we now accept that a person acquiring a completed residential or charitable development as part of a transfer of a going concern inherits ‘person constructing’ status and is capable of making a zero rated first major interest grant in that building or part of it as long as:
a) a zero rated grant has not already been made of the completed building or relevant part by a previous owner (for this purpose, HMRC consider that the grant that gives rise to the TOGC should be disregarded)
b) the person acquiring the building as a TOGC would suffer an unfair VAT disadvantage if its first major interest grants were treated as exempt (for example, a developer restructures its business. This entails the transfer (as a TOGC) of its entire property portfolio of newly constructed residential/charitable buildings to an associated company company, which will make first major interest grants. If these were treated as exempt, the transferee might become liable to repay input tax recovered by the original owner on development costs under the Capital Goods Scheme or partial exemption “claw back” provisions and would incur input tax restrictions on selling fees that would not be suffered by businesses in similar circumstances - we would consider this to be an unfair disadvantage)
c) that person would not obtain an unfair VAT advantage by being in a position to make zero rated supplies (for example, by recovering input tax on a refurbishment of an existing building)
The above guidelines also apply in respect of ‘person converting’ status (for buildings converted from non-residential to residential use) and ‘person substantially reconstructing’ status (for substantially reconstructed listed buildings).
Although ‘person constructing’ status may now transfer as part of the TOGC of a property, the ‘change of use provisions’ would still need to be considered in the case of relevant residential and charitable buildings, i.e. the change in policy on person constructing does not dis-apply the change of use provisions.’