The recent case of Clark Hill Ltd – v – HMRC determined by the First Tier Tribunal re-affirmed that the timing of the decision to opt to tax and the relevant effective date of that OTT are vital to protect the status of property transactions that are undertaken as Transfers of Going Concern (TOGC) and therefore outside the scope of VAT.

Why a TOGC?

1. A property on which an option to tax exists attracts a VAT charge at the standard rate on any consideration paid on its sale or dealing.
2. TOGC provisions can apply to a property which involves the transfer of a business or part of a business where the buyer intends to use the property for the same kind of business as the seller.
3. If specific conditions are met no VAT charge arises on the disposal.

What conditions?

1. The buyer must be registered for VAT
2. The decision by the buyer to opt to tax must have been made and notified to HMRC within 30 days of the decision but before the ‘relevant date’.
3. The ‘relevant date’ is the date of supply. This occurs on exchange of contracts where a deposit is paid to the seller as agent. Where paid to a third party as stakeholder this occurs when released to the seller, usually on completion.

In the recent cases Clark Hill (CH) sold four properties in three separate transactions. No VAT was charged on the sales by CH on the basis that they qualified as TOGCs. The Tribunal had  to determine what the ‘relevant date’ was in each case and whether on that date each purchaser had notified HMRC of  the option to tax. If the notification had been made on or before that date this would allow the transfers to qualify for TOGC treatment.

1. On two properties sold at auction a deposit was paid to CH’s solicitors as agent. The Tribunal determined that these transactions were not  TOGCs. The relevant date was the date the deposit were  paid (as they were paid as agent)  and at that point there was no OTT.
2. The third property was also sold at auction but under the common auction conditions with the deposit being paid to the auctioneer. No buyer’s OTT was in place prior to the auction however it was notified and in place prior to the auctioneer releasing the deposit to the sellers solicitors.  The sellers solicitors held the deposit  as agent however,  TOGC conditions were met as the relevant date was when the deposit was paid to the solicitors as agent not the date of the auction or payment by the buyer to the auctioneer .
3. A contract for the sale of the fourth property by private treaty also failed to meet the  TOGC conditions. Here the contract was novated and it was held that the OTT notification had not been made before the relevant date . The argument that completion was the relevant date was rejected and VAT on the consideration was due.

It is worth noting that:.

1. An OTT can be made at any time even if a buyer has no legal interest in a property at that time
2. Notification can be made immediately the decision to OTT is made and if requested the effective date can be the date of decision.
3. It is recommended that OTT decision and notification to HMRC occurs before exchange of contracts.

The recent tribunal decisions  are  a reminder that  the timings of notifications of the OTT is crucial. The OTT must be  made before the date of supply in order that the transaction can qualify as a TOGC..  Ensuring that a transaction qualifies as a TOGC will be of particular concern to those purchasers who  can not reclaim any VAT paid.  For further information please contact  Carolynn Davies on 0207 400 5032 or click here to email Carolynn.