Granting long leases and TOGCs24th January 2014
Commercial Landlords are starting to get more comfortable with treating the grants of long leases as TOGCs
In 2012 HMRC published HMRC Brief 30/12 which confirmed that provided certain requirements were fulfilled, henceforth HMRC would be prepared to treat the disposal of a commercial property which was subject to a letting business, by way of the grant of a long lease, as a transfer of a business as a going concern (TOGC). Provided therefore that both the seller (landlord) and the buyer (tenant) had elected to waive the usual VAT exemption, as well as complying with other rules necessary to qualify for TOGC treatment, then VAT would not need to be paid on these sorts of transactions. Since the change in approach by HMRC the market has been quite slow to respond and in many cases landlords are refusing to treat such disposals as TOGCs and requiring buyers to pay the VAT. While the VAT may ultimately be recoverable, the SDLT on the VAT element is not.
A year or so down the line, we are starting to see sellers and buyer become more comfortable with this approach. One of the reasons for the reticence of landlords has been down to the ambiguity in the 30/12 Brief with regard to one of the requirements for TOGC treatment on the grant of a long lease, namely, the “1% test”. HMRC stated that if the interest retained by the transferor represented more than 1 per cent of the value of the property, then this would be “….strongly indicative that the transaction is too complex to be a TOGC”. By way of example, if a long lease is granted of a ground floor commercial unit but the remainder of the building comprises undeveloped residential parts, the interest retained by the landlord is likely to be valued at well in excess of 1% of the property. In this very common circumstance was it the intention of HMRC that this should not be a TOGC? HMRC have indicated that the intention is that the specific part of the building out of which the lease is granted is what is to be considered but this has not been entirely clear to date.
No doubt as the market becomes more comfortable and more bullish on this point, HMRC will be asked to clarify more formally and parties involved may consider it prudent to approach HMRC for guidance on a case by case basis if the matter is unclear.