Sale Of A Commercial Property With A Sitting Tenant – VAT Position

When buying a commercial property, it is important for the buyer to establish the VAT positions of the property and whether the seller intends to charge VAT on the sale to the buyer.

Commercial property sales can either be VAT ‘exempt’ or ‘standard rated’. The majority of properties are exempt and therefore no VAT is payable by a buyer on completion (unless there has been an option to tax which then makes a property standard rated and as such VAT is payable on completion).

However, the position differs where there is a sale of a business involved. A business sale will most likely include a number of assets associated with it, such as its premises.

Transfers of Going Concern (TOGC) and commercial property sales

When a property is sold with a sitting tenant and is operated as a property rental business (e.g. the sale is going ahead with tenants in place with a current lease), this is known as a Transfers of Going Concern (TOGC) and it is outside the scope of general VAT regulations. Provided certain conditions are met the property will be VAT exempt. These conditions are broadly:

  • The buyer and seller are registered for VAT;
  • The buyer and seller must have opted to tax, e.g. standard rate the building; and
  • The buyer must intend to carry out the same kind of business as the seller.

TOGC case example

In the case of General Distribution and Storage Ltd v Revenue & Customs, it was ruled that the property sale was not a TOGC.

General Distribution and Storage owned freehold premises leased to Starbucks. It sold the building with the lease to Hartlone Scaffolding Ltd with completion agreed for 5th April 2016.

Harlone had already contracted to sell to another company, Foundry Investments Limited. Therefore, this was a back to back sale with the completion of both contracts set for 5th April 2016.

General Distribution and Storage received on completion £800,000 plus VAT £160,000 (so VAT was collected on completion). The company did not pay over to HMRC the VAT and when assessed GD argued that the deal to Hartlone was a TOGC so no VAT was due.

The First-Tier Tribunal disagreed. One of the conditions of TOGC, is that the buyer (Hartlone) intends to operate the business being transferred, but since it had pre-sold it to Foundry Investments, there was no such intention. Therefore, VAT was payable by General Distribution and Storage to HMRC.

TOGCHow can Nelsons help?

Mary Gharmount is an Associate at Nelsons, specialising in commercial property law sales.

In circumstances, such as the above case, it is always important that that the buyer and seller take tax advice on the complete structure of the deal at the early stages.

If you require any advice in relation to the subjects discussed in this article, please contact Mary or another member of our Commercial Property team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online enquiry form.

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