VAT payable on real estate deal as election made too late

Out-Law News | 28 Mar 2018 | 4:29 pm | 4 min. read

A UK tax tribunal has ruled that VAT was payable on a property deal because the buyer did not opt to tax before a deposit was paid, despite the seller’s claim that VAT was not due because the sale was of a going concern.

The transfers of investment properties were subject to VAT and did not qualify as transfers of a going concern (TOGCs) because options to tax had not been made by the buyer before deposits were paid to the seller's solicitor to be held as agent for the seller, the First-tier Tax Tribunal has decided.  

"The case highlights the importance of considering VAT at an early stage in any property transaction and certainly before any money changes hands. Once heads of terms have been agreed, in order to secure TOGC treatment a buyer should really be considering exercising the option to tax," said Andrew McCarthy, a property tax expert at Pinsent Masons, the law firm behind Out-Law.com.

Property investor Clark Hill Limited sold four different properties and argued that the sales constituted TOGCs for VAT purposes. The sales all involved deposits held, at some point, as agent. HM Revenue & Customs said that TOGC treatment was not available and that Clark Hill had to account for VAT.

In property transactions a deposit is typically paid by the seller on exchange of contracts, with the remainder of the price being paid on completion. The deposit may be held as agent for the seller or as stakeholder. If a deposit is paid as agent, the seller's solicitor can pay the money to the seller before completion. If the deposit is held as stakeholder, the solicitor can only pay the deposit to the seller on completion. On commercial transactions it is more normal for the deposit to be paid as stakeholder.

Where a deposit is paid as stakeholder, the payment of the deposit will not affect the tax point, which will usually be completion. However, the payment of a deposit triggers a tax point on the date the deposit is paid.

VAT may be payable by the buyer of a commercial property if the building is new or the seller has opted to tax. A sale of a let commercial property may constitute a TOGC, which is outside the scope of VAT. However, TOGC treatment will only be available if conditions are satisfied. These include that where the seller has opted to tax, the buyer also opts to tax and notifies the option to HMRC before the 'relevant date', which is defined as "the date upon which the grant would have been treated as having been made".

In respect of properties in Byker and Hayes, Clark Hill entered into auction underwriting agreements under which the underwriter would buy each of the properties for a given price unless Clark Hill obtained better prices at auction. The underwriter paid deposits to Clark Hill's solicitors to be held as agent for Clark Hill. As Clark Hill did not obtain higher prices at auction, the underwriter was obliged to buy the properties. It exercised the option to tax the properties and then completed the purchases. HMRC argued that TOGC treatment was not available as the options to tax had not been made and notified before the deposit was paid.

Judge Ashley Greenbank dismissed Clark Hill's argument that the 'relevant date', by which the option to tax had to have been made and notified, was completion and not the payment of the deposit as agent. He said the point had already been decided in a previous High Court judgment which was binding on the tribunal. He also dismissed an argument that there were two relevant dates, finding that there could only be one relevant date for the purposes of the TOGC rules in relation to each sale of a property. The sales could therefore not be treated as TOGCs.

The tribunal found in favour of Clark Hill in relation to another property which was sold at auction. A deposit was paid to the auctioneers on the day of the auction and the buyer notified HMRC a day later that it had opted to tax the property. Under the conditions of sale the auctioneer was expressed to be acting as stakeholder, unless this was overridden by a special condition. There was a condition that the deposit would be held as agent by the seller's solicitors, but the buyer had opted to tax and notified the option before the auctioneers paid the deposit to the seller's solicitors.

HMRC argued that as the auctioneer had released the deposit to the seller's solicitors to be held as agent there was an implied condition which overrode the general conditions, meaning that the auctioneer was also acting as agent. The tribunal disagreed and found that this transaction was a TOGC as the deposit was held by the auctioneer as stakeholder and the option to tax had been made before the deposit was paid to the solicitors who were holding it as agent.

In another situation Clark Hill entered into a contract to sell a property in Henley to an individual, who paid a deposit to be held as agent for Clark Hill. A month or so later a company opted to tax the property and a deed of novation was entered into so that the individual's rights under the contract passed to the company. The taxpayer argued that because the contract had been novated, Clark Hill should be treated as having received the deposit at the date of the novation. The judge agreed, but at a late stage in the proceedings HMRC introduced evidence that although made earlier, the option to tax was expressed to take effect on completion and so the TOGC conditions were not satisfied.