05 September 2014 #Commercial Real Estate
Landlords and tenants will welcome a recent change in HMRC policy on the application of VAT to the surrenders of leases.
Until recently the surrender of a lease has not qualified as a transfer of a going concern (TOGC) – a transaction that lies outside the scope of the usual VAT rules where VAT is not charged on the transfer of a business - as HMRC has deemed that a surrender cannot meet the usual criteria for a TOGC.
Landlords have therefore been required to pay VAT on any premium paid to a tenant in respect of a lease where the tenant has opted to tax the property.
However as of 9 July 2014, HMRC has confirmed in their Revenue & Customs Brief 27/14 that where the surrender of a lease meets the required TOGC conditions, for example, where the intermediate leaseholder surrenders a sublet property to the freeholder and the freeholder continues the business of letting the property to the tenant, this transaction will qualify as a TOGC.
This is of importance to the parties to a surrender as if a transaction qualifies as a TOGC, this enables the parties to it to manage their cash flow more effectively as VAT will not have to be paid and then claimed back from HMRC. In addition there will be a reduction in the stamp duty payable on the landlord`s surrender premium as this is calculated on the VAT-inclusive sum.
HMRC has further confirmed that it will repay overpaid VAT in respect of historic transactions where the parties can show that the TOGC conditions were met and will also repay stamp duty where the VAT has been refunded – any such claim must be made in the usual manner no more than four years from the date of the TOGC.
Where VAT is to be claimed in respect of a retrospective transaction, one concern may be that for a transaction to qualify as a TOGC, a notice must usually be served by the landlord on the tenant confirming the option to tax has not been rendered ineffective. HMRC have now clarified that they will accept claims where this condition has not been met provided that the parties can show that this notice requirement did not exist at the time of the transaction.