TOGC or not TOGC, that is the question

When housebuilders are dealing with the sale or purchase of land where partial works have been carried out, there’s a possibility of that transfer constituting the Transfer of a Going Concern (TOGC) for the purposes of VAT.

Due to a shortage of available sites, particularly in Scotland, housebuilders are increasingly collaborating to share risk and reward.

Transfers of serviced land between housebuilders within larger developments are becoming more common, meaning this is an issue that housebuilders may need to consider more frequently.

Understanding TOGC in the context of transfers of land

A TOGC is a VAT concept that allows for the transfer of a business (or part of a business) as a going concern without VAT being charged, subject to strict conditions. The sale of let investment property has long been established as an example of a property sale also being a TOGC. Although not as commonly encountered, a sale by one housebuilder to another can also be considered the sale of part of a business where that sale includes land, some partial development or construction works on that land (perhaps the seller having platformed the site, laid services etc) and there's an intention on the part of the purchaser to continue the development. TOGCs are out with the scope of VAT and so, where the criteria are met, the transfer is not a VATable supply – saving the purchaser both in terms of cash flow and LBTT. 

Identifying and agreeing whether the criteria are indeed met, is not straightforward. However, applying TOGC treatment is not optional – if the criteria are met, a TOGC exists and HMRC could prevent the reclaim of purported input VAT paid where that is the case. Accordingly, the position does need to be considered.

Key TOGC conditions to watch for

For the TOGC to apply in this context, the following conditions must be met:

Type of Business

The seller must be carrying on a property development business and a genuine ongoing business activity, not just holding land as an investment.

Business continuity

• The purchaser must intend to carry on the same kind of business (i.e. property development) and intend to carry it on following transfer (i.e. a break between acquisition and your starting works may be problematic).
• The purchaser must use the land for taxable supplies (e.g. building and selling new homes, not exempt residential leasing).

VAT registration

The seller and the purchaser must already be VAT registered at the time of transfer.

Opt to tax

Where land is opted to tax, TOGC can only apply if the purchaser has also opted to tax notifies HMRC before the transfer.

If these conditions are not all met, the TOGC fails. There are some specific risks where partial works are involved.

Specific risks where partial works are involved

Partial development works complicate matters because:

Character of the supply

• If construction has begun, the sale may be viewed as a supply of a partially completed building, not just land i.e. has golden brick stage been reached and so the supply is zero rated.
• HMRC might scrutinize whether this is a business transfer or merely a sale of assets.

Evidence of business

The purchaser must prove they are acquiring a business, not just land. This includes continuity of planning permissions, designs, marketing plans, construction contracts, etc. Where the purchaser requires to vary a planning permission obtained by the seller, this may indicate discontinuity, but the level of variation will be a consideration. It is not clear whether substitution of house types would not break the continuity albeit more substantial remixes or layout changes are likely to. This is a matter for HMRC to determine and there is unfortunately little guidance in this area as yet. The position is somewhat clearer where the seller is carrying out initial works under a planning permission in principle as the purchaser would take its own AMSC consent rather than require to vary. 

Practical steps housebuilders should take

For the seller:

• Determine whether a TOGC is likely and prepare supporting documents (e.g., development appraisals, ongoing contracts). Considering the approach may be novel to the purchaser, sharing this information and addressing the issue in early course would be beneficial.
• Ensure the land is opted to tax (if applicable) and notify the purchaser accordingly.
• Include VAT and TOGC provisions in the sale contract (e.g., clause confirming intention to treat as TOGC and consequences if HMRC disagrees). Note that it may also be prudent to make specific provision where the conclusion is that the sale is not a TOGC.

For the purchaser:

• Ensure VAT registration is in place.
• If required, opt to tax the land and notify HMRC before completion.
• Confirm and document the intention to continue the same type of development business.
• Perform due diligence to assess whether the transaction qualifies as TOGC and ensure contractual protection if it doesn't.

Summary

Housebuilders must take care where partial works exist, as this creates a grey area in terms of whether a TOGC applies. The financial and tax stakes are high, so ensuring compliance with VAT rules, contractual clarity, and professional advice is essential to avoid costly mistakes. Your own tax team has experience of recent examples where the TOGC threshold has and has not been met. However, the other party may be unaccustomed to considering the application of TOGC to this type of transaction and it may prove difficult to shift preconceptions. This is an evolving area and early engagement with the other party and professional advisers is needed.

If you would like to discuss anything raised in this article, please get in touch with Laura Millar or your usual Burness Paull contact.

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