TOGC
HMRC has revisited its policy on property assets transferred as
going concerns ('TOGCs') in R&C Brief
27/14. This is a follow up on Brief 30/12, which was issued a full
18 months ago, and promised to revisit the issue. It is difficult
to discern why it has taken 18 months to review the relatively
simple points which the Brief covers.
In summary, the rule which allows TOGC treatment where the grant
does not involve outright sale, but rather, the seller retains a
vestigial interest in the property, is to be extended to
'trading premises' of businesses other than a property
rental businesses. This will cover industrial units, retail
premises, and offices, which are used by businesses which are sold
together with these premises. HMRC originally seemed unwilling to
allow this unless the property generated rent. But there was never
any reason given as to why the two classes of use should be
regarded in a different light, and the latest Brief does not
explain why there was a doubt.
HMRC now invites claims where VAT has been overcharged to the
detriment of the parties. Perhaps they wanted to delay these claims
by 18 months to improve the public finances.
The same Brief enlightens us on whether a surrender of an interest
in an investment property can be a TOGC. This point was also held
over from Brief 30/12. This can arise where a head lessee (say)
wishes to surrender his interest to the freeholder. The freeholder
receives the benefit of all of the sub-leases together with the
lease. HMRC has now announced that this transfer is a TOGC, since
it effectively transfers a property rental business. Where was the
doubt in that? We are told the doubt was because the surrendered
interest merges immediately into the superior interest, so the
asset has not in effect been received by the freeholder. This
ignored the fact that the asset was transferred. So, we have now
been told that such transactions are TOGCs, which seems
obvious.
The Brief repays further reading on some more technical areas, and
in particular, the way in which the changed policy on VAT and
transfers of properties can impact on the SDLT liability.
Partial Exemption
HMRC has also been trying to challenge input tax recovery by
property businesses. This can arise in cases where the lessor of a
taxed property also provides insurance for the tenant's
contents. The insurance element is exempt, which means that costs
relating to the overall business may prove to be only partly
recoverable. How one measures that recovery is therefore a critical
aspect.
The case of Lok'n'Store, which provides storage
services and related insurance, shows how willing HMRC is to try to
depress the level of VAT recovery below what would seem sensible to
a management accountant. The taxpayer acknowledged that a storage
facility normally gave rise to both taxable storage supplies and
exempt insurance supplies. It argued that, in effect, only the
administrative offices and the front desk, were related to the
insurance. The main part of the building, which physically housed
the goods that were being stored, only had a relationship with the
generation of taxable supplies.
HMRC required that all of the costs of constructing the building
would be apportioned in the ratio of the value of taxable supplies
to the value of both taxable and exempt supplies. The taxpayer
argued that the building construction and maintenance costs should
be apportioned first by reference to the floor area dedicated to
storage, and then the remaining construction and maintenance VAT
costs would be apportioned according to relative turnover achieved
by the two kinds of supplies. HMRC is litigating this point, and so
far two tribunals have found against HMRC and in favour of the area
based cost allocation approach. We wait to see if HMRC decides to
soldier on with its rather basic view of cost allocation, and to
attempt yet another appeal.
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