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HMRC internal manual

VAT Transfer of a going concern

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HM Revenue & Customs
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Land and Property: special rules for certain categories of land which would be standard rated if supplied

  1. Transfers of land prior to 18th March 2004
     

The VAT (Special Provisions) Order SI 1995/1268 sets out the special rules governing transfers of land as part of a TOGC. Prior to the extension of the tax avoidance measures on 18th March 2004, Article 5(2) stated that:

A supply of assets shall not be treated as neither a supply of goods nor a supply of services by virtue of paragraph (1) above to the extent that it consists of -

(a) a grant which would, but for an election which the transferor had made, fall within item 1 of Group 1 of Schedule 9 to the Act; or

(b) a grant of a fee simple which falls within paragraph (a) of item 1 of Group 1 of Schedule 9 to the Act,
 

unless the transferee has made an election in relation to the land concerned which has effect on the relevant date and has given any written notification of the election required by paragraph 3(6) of Schedule 10 to the Act, no later than the relevant date.

Thus, even where there is a TOGC, land included which is either:

  • the subject of an option to tax by the seller; or
  • new or unfinished buildings or civil engineering works which would ordinarily be standard rated,
     

will be a (standard rated) supply, unless the purchaser opts to waive exemption and notifies this option to Customs in writing by the relevant date. Notification and relevant date are explained at VTOGC6310.
 

  1. Transfers of land from 18th March 2004

New anti tax avoidance measures were introduced to combat schemes in which opted properties are transferred free of VAT to businesses that will use them for exempt purposes. The disapplication test at 2(3AA) of Schedule 10 was extended so that after that date any business making supplies under a grant that was originally made by the transferor of the business, could have its option disapplied. Article 5 was amended to prevent transferees who had had the option disapplied from acquiring the property as a TOGC. Guidance on the option to tax anti avoidance measures can be found in V1-8 and notice 742A.

From 18th March 2004 the Article was amended (by SI2004/779) as follows:

5(2) A supply of assets shall not be treated as neither a supply of goods nor a supply of services by virtue of paragraph (1) above to the extent that it consists of –

(a) a grant which would, but for an election which the transferor had made, fall within item 1 of Group 1 of Schedule 9 to the Act; or

(b) a grant of a fee simple which falls within paragraph (a) of item1 of Group 1 of Schedule 9 to the Act,

unless the conditions contained in paragraph (2A) below are satisfied.

5(2A) The conditions referred to in paragraph (2) above are that the transferee has, no later than the relevant date –

(a) made an election in relation to the land which has effect on the relevant date and has given any written notification of the election required by paragraph 3(6) of Schedule 10 to the Act; and

(b) notified the transferor that paragraph (2B) below does not apply to him.

5(2B) This paragraph applies to a transferee where –

(a) the supply of the asset that is to be transferred to him would become, in relation to him, a capital item as described in regulation 113 of the Value Added Tax Regulations 1995 if the supply of that asset to him-

(i) were to be treated as neither a supply of goods nor a supply of services; or

(ii) were it not to be so treated; and

(b) his supplies of that asset will, or would fall, to be exempt supplies by virtue of paragraph 2(3AA) of Schedule 10 to the Act.

  1. What are the effects of the change?
     

In addition to notifying his option to HMRC, from 18 March 2004, paragraph (2A)(b) requires all transferees opting to tax the land or property they acquire to notify the transferor by the relevant date, that his option has not been disapplied i.e. that Article 5(2B) does not apply to him.

Paragraph (2B) applies where:

  1. the land or building being supplied to the transferee becomes a capital item under the capital goods scheme, or would have been a capital item were they not to be treated as a TOGC; and
  2. the transferee’s option to tax is disapplied under the anti avoidance provisions in paragraph 2(3AA).
     

If by the relevant date the option to tax has not been notified to HMRC and the transferee has not notified the transferor that his option has not been disapplied, the supply of the property is not de-supplied by the TOGC provisions. This applies to all TOGCs of land and property not just transfers of property rental businesses. For example, if a manufacturer has opted to tax his unlet factory then the sale of the property that is an asset of the business transferred will be a standard rated supply unless the purchaser opts and makes the notifications required. This does not prevent the transfer of all the other assets being de-supplied by the TOGC provisions.

Remember that for the transferor’s option to be in place by the time of the transfer he must have complied with the notification procedure. This is not necessarily the same as the transferee’s requirement to notify the decision to opt. Where someone is required to request permission from HMRC to opt to tax, the earliest effective date of the option to tax will be the date that the permission is granted. So if the seller has not been granted permission by the relevant date his option is not effective. However, where the TOGC provisions apply the transfer of the property will not be a supply of goods or services. It does not matter whether the buyer has opted to tax or not, as the seller’s option is not effective at the date of transfer (see 700/9)