Transfer window – TOB or not TOB?

TOB or not TOB? That is the question that has exercised the minds of VAT practitioners in recent years, particularly in the context of the large volume of property sales transacted by receivers and liquidators.

While the much-anticipated Revenue guidance issued in July 2014 and updated in November 2015 detailed the application of transfer of business relief, new guidance published on 31 July 2018 provides welcome clarification on a number of issues.

Where ownership of all or part of the assets of a business are transferred to an accountable person, that transfer is deemed not to be a supply of goods for VAT purposes, provided the assets transferred constitute an undertaking or part of an undertaking capable of being operated on an independent basis.

Ceased trading

The relief applies even if the business or part of the business transferred has ceased trading. Goodwill or other intangible assets of a business transferred with that business are deemed not to be a supply of services.

These deeming provisions are known as ‘transfer of business (TOB) relief’. Where the relief applies, VAT does not physically have to be charged or collected on a sale.

The classic transfer of a business as a going concern includes premises, employees, plant and machinery, stock, goodwill, intellectual property and debtors.

The CJEU has ruled in Zita Modes that the relief “does not cover the simple transfer of assets”; it only applies where the assets transferred “constitute an undertaking or a part of an undertaking capable of carrying on an independent economic activity”.

Revenue takes the view that property sales can come within the scope of the relief. In this regard, it is fair to say that Revenue takes a broad view in relation to the application of the relief.

Where the relief applies, VAT is not chargeable on the sale, and the sale does not give rise to a VAT liability in the form of a capital goods scheme adjustment for the vendor.

However, this does not mean that the sale is without VAT implications for the purchaser. At a high level, those implications depend on whether the property is commercial or residential.

Specific property issues

Broadly speaking, where the relief applies to a commercial property sale, the purchaser is treated as if the purchaser acquired it when the vendor did. For VAT purposes, the purchaser effectively ‘steps into the shoes’ of the vendor for the purposes of the capital goods scheme.

The VAT capital goods scheme is a mechanism for determining VAT recovery in respect of a property over its VAT life. Where VAT is originally recovered on a property, but it is subsequently put to a VAT-exempt use, there is a clawback of a portion of the VAT originally recovered, which is essentially time apportioned.

Completion

A property remains within its VAT life for a period of 20 years from the date of first completion, or ten years in the case of development works carried out on a previously completed property.

Where a property remains within its VAT life, the purchaser must continue to use it for VATable purposes – for example, by charging VAT on rents – to avoid triggering a clawback of VAT recovered on its acquisition or development.

The VAT clause included in the sales contract should oblige the vendor to provide a VAT record known as a ‘capital goods record’ to the purchaser.

This record shows the VAT incurred on acquisition and/or development of the property, the VAT recovered, and the use of the property on an annual basis.

Distressed sales

This requirement poses particular difficulties in the context of distressed sales. The borrower is obliged to provide a record, but rarely does so.

In such circumstances, reasonable endeavours should be made to obtain whatever information is available, and the VAT clause will usually specify that the record is being provided based on the information currently available, or words to that effect.

Furthermore, where properties were purchased from receivers and are now being sold under TOB, vendors caveat the VAT clauses and specify that the information is based on what is available.

Where the relief applies to a residential property sale, it is not possible for the purchaser to ‘step into the shoes’ of the vendor for the purposes of the capital goods scheme. This is largely because it is not possible to put a residential property to a VATable use by opting to tax lettings post 1 July 2008.

This means that a residential sale triggers repayment of VAT recovered by the vendor or payment of VAT chargeable on a sale absent TOB relief. VAT legislation contains a special provision that shifts responsibility for remitting the VAT due to Revenue to the purchaser.

This distinction in the application of the relief has created particular difficulties in negotiating residential property sales. As the purchaser may have to account for the VAT, the purchaser needs to factor this into the price to be offered. In addition, there has been much debate as to the extent of the application of the relief to let property.

Distressed sales have proven particularly problematic, largely because the majority of these sales are to non-accountable persons, typically at auction. In such circumstances, the receiver or mortgagee in possession must discharge the VAT liability.

New Revenue guidance

Revenue has provided welcome clarification on the application of the relief to the sale of let property. Previous guidance stated that the relief could apply to the sale of vacant property that was let or partially let in the past on a continuing basis.

However, no guidance was provided on the length of letting that would satisfy the requirement. In addition, applying the relief to such sales appeared to run contrary to the spirit of the legislation, as it was difficult to see how the transfer of a single vacant (but previously let) property could constitute the transfer of a business rather than an asset sale.

The new guidance provides that the transfer of property of itself, without additional assets such as a letting agreement, no longer qualifies for the relief – regardless of past use.

Let property only qualifies for the relief if it is transferred with the benefit of an existing letting agreement, agreement to lease, or licence that, together with the property, are capable of constituting an independent business or undertaking. This is a welcome clarification on the operation of the relief.

Revenue has altered its thinking in relation to the transfer of a property from a landlord to a tenant. In previous guidance, this came within the scope of TOB relief. However, this is no longer the case.

Relief

It also reaffirms that the transfer of property that is part let, part vacant, and part undeveloped by a single vendor in one transaction to a single purchaser qualifies for relief. However, the vendor must be in a position to demonstrate that the property was developed with the intention of using it for the purpose of a letting business.

The guidance provides that the transfer by a co-owner of his/her interest in let property to another co-owner or a third party qualifies for relief. The relief also applies to the sale of an option to acquire property where the relief applies to the underlying sale.

Overall, the guidance emphasises the need for substance where the parties to a property transfer seek to apply the relief. A transfer of property of itself (whether or not previously used for the purpose of a business) without additional assets that, together with the property, constitute an independent business or undertaking, will not qualify for the relief.

The guidance applies to assets transferred on or after 31 July 2018. Previous guidance applies to assets subject to binding contractual arrangements put in place prior to that date but transferred on or after that date.

Not out of the woods yet

As is always the case with VAT, there are additional issues to be addressed.

Previous guidance confirmed that the relief applied to vacant property used for the purposes of a business in the past, having the necessary quality and attributes to be used for a similar business again immediately after transfer. The example cited was a factory vacant at the time of transfer, with all the necessary fixtures and fittings to be operated as a factory again following transfer. This example is not included in the new guidance.

As the relief can apply to the transfer of a business that has ceased trading, it is submitted that it could still apply to this scenario, where the parties are in a position to prove that there is substance to the transaction. This would need to be considered on a case-by-case basis, having explored the possibility of making a Revenue submission.

Although the clarifications – particularly in relation to let property – are welcome, the difficulties outlined above continue to arise in respect of residential property sales.

It is submitted that the best way to deal with these issues may be to exclude residential property from the application of the relief.

Future VAT recovery

On first principles, the vendor is entitled to a deduction of input VAT in respect of services directly related to the transfer of business assets where the transfer would have been taxable absent TOB relief. In the property context, entitlement to a deduction will only arise where this is the case without the parties exercising the joint option for taxation.

Acceptance

However, Revenue has indicated acceptance of the application of the CJEU decision in the Abbey National case to the calculation of recoverable VAT on costs incurred in connection with a sale subject to TOB relief.

The court held that, where the assets being transferred give rise to transactions that are subject to VAT – for example, rents subject to VAT – all of the VAT on sale-related costs is recoverable. An apportionment is required where there is a mix of rental income.

Where the relief applies to a sale, the VAT implications of the transaction for both the purchaser and the vendor must be carefully considered. Where the value of the property and/or any development works carried out on it is high, mistakes are likely to be cost