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Comment: Schriever case suggests grant of a lease can be a TOGC
Current HMRC practice is that the grant of a new property interest cannot amount to the transfer of an asset, and so cannot be part of a transfer of a going concern (TOGC) for VAT purposes. A recent case at the ECJ suggests that the grant of a lease can be included in a TOGC. If followed, this decision could prevent business purchasers suffering the cashflow implications of being charged VAT and, in some cases, bearing the cost of irrecoverable VAT.
In the Schriever case (Case C-444/10) the taxpayer sold the stock and fittings of her sports retail business to a company. At the same time, she granted a lease of the shop premises - which she continued to own - to the buyer. The lease ran for an indefinite period, terminable on notice. She treated the sale of the stock and fittings as a TOGC (in EU law terms, the transfer of a "totality of assets, or part thereof") and did not charge German VAT. The buyer continued to run the business from the premises for nearly two years, but the German tax authorities asked the seller to account for VAT which they claimed should have charged on the assets included in the original business sale.
The German courts asked the ECJ whether there could be a TOGC where premises used by a business were not also transferred to a buyer of the business, but the seller instead granted a new lease of the premises to the buyer.
The ECJ confirmed that the concept of a transfer of a "a totality of assets, or part thereof" is a free-standing term of EU law, which must be interpreted uniformly across the EU, and means a transfer of the tangible and intangible elements of a business (or an independent part of a business) which form an economic undertaking that can be carried on independently. In particular, it does not include a simple transfer of assets, such as a sale of stock.
The ECJ ruled that, if a business does not need any particular premises but could be operated at any suitable location, then there can be a TOGC even if the seller does not sell its business premises to the buyer, so long as the buyer has some other premises available to carry on the business after the sale. A retail business would usually fall in this category, as the precise location of the premises is not vital to the continued operations of the undertaking.
If the business can only be operated at one location, then the ECJ ruled that the buyer will need to obtain possession of the premises for the sale to be a TOGC. However, it seems clear from the ECJ's reasoning that premises can be made available to a buyer of a business through a lease. The precise legal mechanism under local law for transferring possession of the premises to the buyer should not matter.
This suggests that the current HMRC view - that the grant of a lease cannot form part of a TOGC - is incorrect. There are many situations in which the seller of a business does not want to sell the premises to the buyer, but is willing to make the premises available to the buyer by granting a lease or sublease. In these cases, where the seller has opted to tax, HMRC requires VAT to be paid on any premium for the grant of the lease, and this can lead to cashflow problems or irrecoverable VAT for the buyer. If the premium can be treated as consideration for a TOGC, these problems will not arise. In principle, this could also apply where a person carries on a property letting business (which is the case for UK VAT purposes where any landowner lets their property to a tenant), and would avoid VAT distinctions between assignment of a lease or grant of a sublease.
It remains to be seen how HMRC will react to this ruling.
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18 November 2011
Author: Andrew Loan
