The normal rules are that vat will apply to any taxable supplies on the transfer unless it is a TOGC. If TOGC conditions are met, then it is mandatory to apply the rules and so the whole transaction falls outside the scope of vat. Land and buildings may or may not be included in the TOGC depending on whether the land is zero rated/exempt or taxable.
TOGC applies when all or part of a standalone business is transferred as a going concern in which case it is not a supply, i.e. outside the scope of vat.
Conditions for TOGC
Assets must be transferred as part of the business and used by the purchaser with an intention to carry on the same kind of business, both seller and purchaser must be taxable (VAT registered) persons. The purchaser must Opt To Tax (OTT) the land if the land is a taxable supply.
The purchaser must be a taxable person as a result of the transfer if the seller is either registered for, or liable to be registered for VAT. So, it is important that the turnover of the seller is taken into account.
The times when a purchaser will not be a taxable person are:
- a) If the value of the purchaser’s future twelve month supplies are expected to be below the threshold limit.
- b) The seller was registered voluntarily and the values of his taxable supplies in the previous twelve months were below the threshold limit.
In the above two conditions, unless the seller is voluntarily registered for vat, the sale will not be a TOGC.
Changes in the constitution of a partnership or transfer of shares are not a TOGC events. A sole proprietor taking on a partner or incorporating are TOGC events.
The purchaser must be or required to be registered at the date of transfer. So, if he is below the VAT threshold, he should be registered at the time of transfer.
Instances when the transfer of land can be included as part of TOGC, along with other assets.
Where there is a transfer of land which is a taxable supply, both parties need to meet certain conditions for the land to be included in the TOGC. The land would be taxable if the seller has OTT it or it is the sale of a new (less than 3 years) commercial building. In this case, the purchaser must notify HMRC of OTT by the relevant date and then notify seller that their election will not be disapplied (in cooling off period).
If the sale of land is exempt or zero-rated, then there is no requirement by the purchaser to notify the HMRC of OTT and the land can be included as part of the TOGC without notification.
It is important that the seller obtains the purchaser’s notification to the HMRC and the non-disapplication of the OTT by the relevant date.
The relevant date for OTT is the time of supply for vat purposes and is either time of transfer or payment of deposit to the seller, both events create a tax point.
The purchasers OTT can be dis-applied if the building is not used for taxable business purposes.
Capital Goods Scheme and Claw back of Input VAT
Applies to land which is sold as a taxable supply (but not zero rated supply) and the value of the supply is more than £250K and the purchaser makes non-taxable supplies within a period of ten years. In this case, there is a claw back of the input vat during this ‘adjustment period’. The adjustment period is reduced to 5 years if at the time of purchase it had less than 10 years to run.
Intention of purchaser
The claim for input vat on capital items is based on the purchaser’s intention at the time of transfer. However, if there is a change of intention within 6 years, or use within 10 years following the transfer, there will be a claw back of vat.
OPTION TO TAX (OTT)
Some points to remember;
- Applies to commercial building not dwellings
- Applies to buildings not land
- Only owner of the building can OTT
- The sale of a more than three year old building is an exempt supply
- After a 6 month cooling off period, OTT is binding for 20 years
Reasons for OTT when you first buy a commercial property
There are usually two scenarios:
Scenario 1- Buyer usually wishes to carry out significant repairs to the commercial building and lets out the property. As letting out is an exempt supply, the input vat cannot be ordinarily recovered unless the buyer opts to tax.
Scenario 2- The seller is selling a new commercial building or an old building which has been opted to tax. Vat cannot be recovered on the cost of purchase unless the purchaser opts to tax.
In order to recover the input vat the new owner must OTT and be VAT registered.
The relevant form is VAT 1614A which must be submitted to HMRC within 30 days of the ‘decision’ to opt to tax the property.
Exempt supplies in the previous 10 years
If the owner has never charged vat on the rentals and he plans to spend on refurbishment and clam input vat back, then form 1614A can be filed if any of the four conditions on the form are met. The four conditions give automatic permission. If the conditions are not met, then form 1614H needs to be filed.
Any one of the four conditions can be met for automatic permission. The four conditions are contained in Notice 742A s5 and there is a helpful flow chart in Annex 2 of the VAT notice.
Previous exempt supplies were in respect of dwellings
The previous exempt supplies have been for rent, service charge and exclude premiums/payments for occupation after the effective option date. You do not expect to claim input tax on refurbishment and redevelopment work but expenditure on repairs and maintenance is fine.
Condition 3- first (output) requirement
A person will not meet this condition if
- a) He makes supplies to a connected person who is unable to deduct at least 80% of the input vat.
- b) The supplies (e.g. prepayment of rent or lease premium), although in respect of a lease made before, relate to the period after the option to tax date unless it is for incidental payments or the lease (period of occupation) runs out within 12 months of the option (‘permissible payments’).
Condition 3- second (input) requirement
A person will not meet the automatic permission test if
He carries out capital expenditure to the property and he intends to use any of the expenditure to make exempt supplies and
None of the exempt supplies are for:
(a) Services in connection with export of goods outside EU, intermediary services in connection with exempt financial services or certain supplies investment gold
(b) Supplies of whole/part of a building whether designed or not designed but intended for use as a dwelling, relevant residential purpose or intended to be converted to such,
(c) Supplies of buildings intended solely for a relevant charitable purpose
(d) Supplies of pitches for residential caravans, moorings for residential houseboats, land to housing associations, land to individuals for the construction of dwellings
(e) Incidental payments (refund of legal fees) or rent /service charges from a lease which runs out within 12 months of the option
(f) Finance supplies incidental to business (e.g. charging of bank interest)
Incidental exempt supplies such as advertising hoard, radio mast, and electricity sub-station.
Non-residential building converted to dwellings and let out
Consider the situation where a purchaser acquires a commercial building which the vendor has opted to tax. The purchaser intends to convert it into dwellings or a RRP (e.g. student accommodation or care home) and let the buildings out. The supply of rent is exempt. The purchaser can request the vendor, before exchange of contracts, not to charge output vat on the sale by giving the seller form VAT 1614D. The form is retained by the seller.
Form 1614D can only be used in connection with buildings and not land. So, if in the above example, the vendor had demolished the building and sold the land, then the purchaser cannot use 1614D to request the vendor to disapply the output vat. However, a housing association that intends to build dwellings or RRP building can issue form 1614G and request override of the option to tax by the seller.
Construction of a new building on a commercial site that has been opted to tax
The new office (commercial) building will be automatically opted to tax. However, the owner can specifically exclude the new building from the old election by completing VAT 1614F upon commencement of construction of the building.
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Article written by Haroon Rafique (Principal, Meer & Co Chartered Accountants and Tax Consultants)
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