With the growing and increasing demand for commercial properties with reliable and cooperate tenants ever increasing, and with an influx of Commercial Property Instructions, we are looking to address the age old question of when a commercial property transaction (commercial conveyancing) should and should not be classed as a Transfer of Going Concern (TOGC).
If the sale of a Freehold involving a new commercial building before or within the 1st three years of practical completion; or if the seller of the asset has opted to Tax the property due to various reasons (for example the property is held in a SPV and the yearly rent is above the exemption threshold) – VAT is payable on the property.
When the above scenario applies for a given transaction, two significant factors need to be taken into account by the purchaser assuming VAT is applicable –
a) VAT at the prevailing rate has to be paid on top of the purchase price, by the purchaser.
For illustration – if the purchase price of the commercial shop is £240,000.00, then, on completion, the purchaser will be required to pay £288,000.00 (including VAT) assuming VAT is 20% (accurate at the point of writing this article).
b) Stamp Duty has to be paid on the purchase price of £240,000.00 + the VAT element which as you will see from this example, has now ‘pushed’ the purchase price from a lower stamp duty bracket of 1% to the higher bracket of 3% for the sums above £250,000.00 but less than £350,000.00
Naturally it is therefore prudent to try and mitigate the higher stamp duty tariff buy removing the VAT where possible by way of TOGC Relief.
How does a Transfer of Going Concern (TOGC) fit into the equation?
Since the sale of a freehold interest (commercial property) usually entails the business operating from the premise continuing to carry out their usual business under the same terms following the disposition, in HMRC’s eyes, a sale of this nature is seen as a Business Sale as opposed to an Asset sale. What this mean in other words is that; the transaction can draw certain TAX relief expectations so long as a set of qualifying criteria are met .
Further details of what these criteria can be found on HMRC’s Website using the following link below-
https://www.gov.uk/government/publications/vat-notice-7009-transfer-of-business-as-a-going-concern/vat-notice-7009-transfer-of-business-as-a-going-concern
It is however worth noting that, a TOGC transaction is not possible where a contract is being sub-sold. This is an instance where a middleman is involved who has secured contracts for a certain asset at £A and then simultaneously sells the same asset to a third party at £B (where £B is rarely less than £A).
The purpose of this article is to provide a very basic (and perhaps over simplified) explanation which can be used for reference when considering a commercial property purchase where VAT is applicable. Great care must be taken when assessing your illegibility for TOGC relief and please contact our team and speak to a specialist member of our commercial panel lawyers before committing to any contracts with sellers.
