United Kingdom: HMRC in VAT surrender!
06 August 2014
Posted by: Author: Kirsten Prichard Jones
Author: Kirsten Prichard Jones (Nabarro LLP)
Summary and implications
In a very welcome development, HM Revenue & Customs (HMRC) has finally confirmed that the surrender of a lease subject to tenancies can constitute a "transfer of a going concern" with the result that no VAT is payable. This will result in stamp duty land tax (SDLT) savings for landlords accepting surrenders and in certain cases it will be possible to reclaim SDLT that has been overpaid on historic surrenders.
Where property is sold subject to tenancies, this constitutes the "transfer of a going concern" (TOGC) for VAT purposes. The benefit of TOGC treatment is that there is no VAT for the buyer to pay on the purchase price and the buyer's SDLT bill is reduced accordingly. Until 2012, HMRC took the view that a sale structured as the grant of a lease subject to tenancies could not constitute a TOGC since this was the creation of a new interest, rather than the transfer of an existing asset.
Similarly, HMRC historically took the view that the surrender of an overriding lease could not qualify for TOGC treatment. This was on the basis that the asset used by the transferor (i.e. the tenant) in carrying on his property letting business ceased to exist on completion and therefore there was no "transfer" of a business.
In both cases this meant that VAT was generally payable on any premium paid on the grant or surrender of a lease subject to tenancies. Not only did funding the VAT result in cash flow issues, but there was also an associated increase in SDLT on the VAT element of the transaction.
Robinson Family Limited
Following the court's decision in the Robinson case in 2012 (Robinson Family Ltd v HMRC  UK FTT 360), HMRC revised its long-standing position in relation to the grant of leases. In the wake of this case, it announced that the grant of an overriding lease can constitute a TOGC in circumstances where the interest retained by the seller is less than one per cent of the value of the property transferred.
It seemed a natural extension of this change in policy that TOGC treatment should also be available on the surrender of an overriding lease. However following the decision in Robinson (which involved the grant of a lease, rather than a surrender), HMRC only revised its view in respect of the grant of leases. It reserved its position on the application of the case to surrenders.
Extension of TOGC treatment to surrenders
It is therefore a welcome development that HMRC has now accepted, with immediate effect, that the surrender of a lease subject to tenancies can also constitute a TOGC, provided that the normal conditions for TOGC treatment are met.
HMRC recognises that there will be historic cases where VAT has been paid unnecessarily on a surrender premium, on the assumption that the surrender could not qualify as a TOGC. Such taxpayers are also likely to have overpaid SDLT on the VAT element of the transaction.
HMRC has invited taxpayers to make repayment claims for both the VAT paid and associated overpayment of SDLT on such transactions. Most landlords who have paid VAT on surrenders will have been able to recover the VAT, however the ability to reclaim overpaid SDLT will be a material benefit where the premium paid was significant. Any claim for repayment of SDLT is subject to two key conditions, namely that:
- claims must be made within four years of the transaction; and
- any VAT overpaid on the transaction must have been refunded.
If you have been involved in a surrender with a significant premium in the last four years, you might be entitled to reclaim VAT and overpaid SDLT.
This article first appeared on mondaq.com.