Transfer of Going Concern (TOGC) on Commercial Property – A Case Study

The sale of a commercial property is generally subject to VAT at the standard rate of 20% if the property is either less than three years old or has been opted to tax by the seller. In such cases, the seller must charge VAT on the sale, and the buyer must pay VAT in addition to the purchase price. Importantly, Stamp Duty Land Tax (SDLT) is also calculated on the VAT-inclusive price, which can significantly increase the buyer’s overall costs.

However, if the property is transferred as part of a transfer of a going concern (TOGC), the transaction is not treated as a supply for VAT purposes, meaning no VAT is charged on the sale, and the buyer pays lower SDLT. In this case study, we explore how the TOGC rules apply in practice through an example involving two companies: Zenith Ltd and R Property Ltd.

Background

Zenith Ltd is the freeholder of a commercial property in the UK. The property is subject to a 20-year lease entered into in January 2024 with a third-party tenant, who operates a restaurant on the premises. The Seller, Zenith Ltd, opted to tax the property from 10 February 2005 and has not opted out.

The buyer, R Property Ltd, registered for VAT. R Property Ltd intends to continue the existing lease on the same terms and retain the property. No fixtures, fittings, or other business assets are included, apart from any items left on-site at completion.

Had the transaction proceeded without consideration for TOGC, R Property Ltd would have been liable to pay VAT of £300,000 on a £1,500,000 purchase price.

Key Conditions for TOGC

Whether TOGC treatment applies is not always straightforward and must be assessed on a case-by-case basis. The key conditions are outlined in Article 5 of the Value Added Tax (Special Provisions) Order 1995 and further explained in HMRC’s VAT Notice 700/9. These conditions are examined below in the context of the current transaction:

Additional Conditions for Land and Buildings

Where a TOGC involves property that would normally be subject to standard-rated VAT, that part of the transfer will fall outside the TOGC rules and remain standard-rated for the purchaser. However, if the buyer has opted to tax the land or building, and that option is both in effect and properly notified to HMRC, the entire transaction would qualify as a TOGC, and no VAT is chargeable on the property.

To meet this condition, the option to tax must be effective and HMRC must be notified no later than the date of the transfer, or if the date a deposit is paid, if earlier.

Additionally, where the transfer includes tenanted properties, HMRC generally regards this as a transfer of a property rental business for TOGC purposes. This applies even if the tenant has not yet taken up occupation or is in a rent-free period, provided there is a lease in place at the time of transfer. However, if the lease has been surrendered, the tenant’s property rental business is considered to have ceased, and the arrangement cannot qualify as a TOGC.

In this case, the existing lease terms are being assigned to the new owner, so the transaction qualifies under TOGC; provided the buyer has an option to tax in place and has notified HMRC by the date of transfer.

Transfer of the VAT Registration Number

Where a business under TOGC from a VAT-registered seller to a buyer who is not yet VAT-registered, it is possible to apply to transfer the seller’s VAT registration number to the buyer. However, doing so also transfers responsibility for the seller’s past VAT affairs to the buyer. This means that any historical VAT errors or liabilities committed by the previous owner would become the new owner's responsibility.

If the VAT registration number is not transferred, the new owner starts with a clean slate and has no liability for the seller’s prior VAT position. It is preferable to keep the VAT registrations separate to avoid inheriting any potential compliance risks.

Although it is not relevant in this case, given that the buyer was already registered for VAT, it is an important consideration for other buyers in similar transactions.

Conclusion

The application of TOGC in commercial property transactions can significantly reduce the tax burden for buyers, not just by avoiding VAT, but also by lowering the SDLT payable. However, the rules are complex and require careful attention to detail. While it is ultimately the seller’s responsibility to determine whether the transaction qualifies as a TOGC, the buyer can support this by providing a written assessment confirming that their position meets the necessary conditions.