This First-tier Tribunal (FTT) case is a useful reminder that the timing of the exercise and notification of options to tax in the context of transfers of going concerns (TOGCs) can be crucial in ensuring that no VAT is payable in respect of the transfer of UK real estate assets. This is particularly true of properties sold at auction where a deposit is payable immediately and the parties may not have considered the tax issues in advance.
In short, to obtain a VAT-free TOGC transfer of opted property, the purchaser's option to tax must be notified to HMRC by the time any amount of the consideration has been released to the seller or its agent. This may or may not be the same time as when it is paid by the buyer, but buyers will need to be aware of this issue and ensure both (i) that the option is notified by the relevant deadline and (ii) that it is expressed to take effect from the correct date.
For this reason, it is critical from a VAT perspective that parties are alive to any changes in a deal timetable which could, for example, result in completion or payments being expedited to a date which is earlier than the date from which an option to tax has been expressed to have effect.
Notify option to tax before payment of deposit
Clark Hill was a property investment company and was registered for VAT. It sold four properties, all of which were opted to tax, in slightly different circumstances. Although VAT was initially paid on each transfer, Clark Hill subsequently argued that these transfers should all have constituted TOGCs.
HMRC and Clark Hill agreed that all the conditions for the transfers to be TOGCs were met, save that HMRC argued that the purchaser's option to tax had not been notified to HMRC by the "relevant date" which is defined in article 5(3) SI 1995/1268 as being the date that the grant would have been treated as having been made or, if there is more than one such date, the earliest of them.
The FTT confirmed that the "relevant date" is when any amount of consideration, including a deposit, is paid and that the purchaser's option to tax must therefore have been notified to HMRC by this date.
As deposits for two of the properties had been paid to the seller on conclusion of the sale contract at auction, with notification of the options to tax only being made subsequently, the conditions for TOGC treatment were not met even though the bulk of the consideration was only payable on completion at a later date. VAT was therefore payable on the full amount, including the deposit.
Deposit paid to auctioneer as stakeholder
The analysis is less straightforward in an auction context.
For one of the properties, the deposit had been paid to an auctioneer to be held as stakeholder pending release to either party. In this scenario, the FTT considered that the "relevant date" for the purposes of the TOGC provisions did not occur until after the deposit was paid by the auctioneer to the seller's solicitors as agent for the seller. As the option to tax was notified to HMRC after the deposit was paid to the auctioneer in this capacity but before the deposit was released to the seller's solicitor, the FTT considered that the TOGC conditions were met in respect of this property.
Novation of contract
The deposit on the final property was paid after the original purchaser had notified an option to tax in respect of it. However, the sale contract was subsequently novated to a new purchaser who opted to tax the property from the date on which it was transferred to him, and no additional deposit was paid by the new purchaser.
Where a deed of novation substitutes a new contract, there is only one grant, i.e. from Clark Hill to the new purchaser. Here, the novation took place after a deposit had been paid by the original purchaser, which gave the FTT some difficulty in deciding when the "relevant date" for the purposes of the TOGC conditions should be. The FTT considered three possibilities:
(i) when the deposit was paid;
(ii) when the contract was novated; and
(iii) when the transfer completed.
Ultimately, the judge preferred the interpretation that the deposit should be treated as received at the time of the novation as it is at that point that the deposit is, in effect, held for the purpose of the new contract and it is pursuant to the new contract that the supply is actually made.
Comment
This case is a masterclass in how not to approach the satisfaction of TOGC conditions, albeit possibly because the transfers were originally treated as VATable and so the parties had not directed their attention sufficiently to the strict timing requirements involved.
The optimum position is to confirm at the outset whether TOGC treatment is available but, even if it is unclear whether other conditions are met, it would be prudent to ensure that options to tax are notified at the earliest possible opportunity and that their date of effect is kept under review until the transaction completes.
