With the number of commercial properties being purchased through SIPPs continuing at a high level, it is useful to set out the treatment of Transfers of Going Concern (TOGC) which might impact some potential property investment cases going forward. 

It is widely accepted that the sale of assets which are capable of being run as a business (a 'going concern') to someone who intends to use those assets for carrying on the same type of business will be treated as a Transfers of Going Concern and so be outside the scope for VAT.

The sale of property can be a TOGC if:
 
  • it is transferred as part of the sale of a whole business; or
  • the property is a business in its own right (for example, an investment business where the land generates a rental income).
Historically, HMRC had required the interest being transferred to be identical to the previous business.
This was such that, if a freehold was owned but only a long leasehold sold off, then a Transfers of Going Concern would not apply as the freehold retained by the seller represented retention of part of the business. 

A First Tier Tribunal on an individual case however found that the retention of such a small interest did not alter “the substance” of the transaction and as such the Transfers of Going Concern exemptions were met and were not subject to VAT.

HMRC will now accept that a retained interest of less than 1% of the value of the business/asset to be transferred will enable the terms of a TOGC to apply. 

This does have ramifications for partial or staggered property purchases which have become common through pension vehicles. See the example below: 

Mr Jones owns a commercial property valued at £750,000 which is leased to his own company. The property is elected to tax. He has a SIPP valued at £375,000 and with borrowing he proposes that the SIPP purchase from him a 2/3rds interest for £500,000. Although the purchase would be subject to the existing lease which would remain in place, the retained interest of 1/3rd of the property means that a TOGC cannot apply and as such VAT would be payable on the purchase. The implications of this are that the purchase price in total will be £600,000 which is in excess of the SIPPs capability even after maximising its potential borrowing power. 

Another implication is that if the SIPP subsequently purchased a smaller percentage of the property, stamp duty land tax would be payable on not only the purchase price but the VAT payable on it as well.

If the pension scheme is registered for VAT, then the VAT can be reclaimed although this can take up to 12 weeks, but it must be funded up front.

Sources: Robinson Family Limited v HMRC [2012] TC02046.  HMRC Brief 30/12 HMRC Brief .