Partner Kevin Hall warns advisers and their clients to take care over their communications.
In 2022, a business and its advisers lost a First-tier Tribunal case when the judge highlighted details in their private correspondence. This will be of interest to practitioners and their clients when discussing plans and intentions. The Haymarket Media Group Limited (TC8495) decision was published on 19 May 2022 by the First-tier Tribunal. The case concerned VAT and whether the vendor had correctly avoided an output tax charge when they sold the land with planning permission, despite having exercised an option to tax. The vendor argued that the sale had qualified as the VAT-free transfer of a going concern (TOGC), either as a letting business or as a development business.
Requirements for TOGCs
TOGCs can be awkward as there are many undefined requirements to fulfil (VAT (Special Provisions) Order 1995, art 5). One requirement is that the assets transferred are assets of the vendor’s business. In addition, those assets are to be used by the purchaser in carrying on the same kind of business as the vendor. HMRC was sceptical as to the intentions of the parties and had pressed to see correspondence with their advisers. What emerged adversely influenced HMRC’s (and later the judge’s) views. It is instructive to see how this unfolded.
The case decision contains private email exchanges and telephone call notes which were entered into evidence by HMRC, as summarised by the judge.
The decision states at para 35: ‘After the heads of terms were issued … the possibility of structuring the sale as a TOGC was mooted on behalf of the purchaser.’ It goes on:
‘On 16 December 2014, Ashcroft [adviser to purchasers] replied to Jeremy Duckworth [vendor] as follows: “Nick and I need to identify any leases that could be in place upon completion and might complete the deal early to qualify for TOGC or if not the question then arises would you allow say a [purchaser] friendly company to take a lease over part of the vacated area say as a site office prior to completion.”’
At para 36, the decision refers to ‘substantive comments between the parties after the conference call to structure the sale as a TOGC’ including:
‘[Solicitors for vendors] wrote to [vendors] (16 Dec 15:38): “As discussed, the structuring of the proposed sale as a transfer of a going concern so as not to attract VAT ought to be respected by HMRC. However, it is not possible to be absolutely certain of this (given the lettings are only in respect of two of the buildings and only a small part of one of those buildings will generate only a modest amount of rent and involve a tenant which is a related company, albeit only commercially, to the buyer) and HMRC could decide that the transaction did not qualify for the relief. In this scenario and while HMRC may not decide to do this as there should not be any actual loss of VAT to HMRC by treating it as a TOGC, on a technical level, HMRC would be entitled to raise an assessment for the full amount of VAT they consider payable (around £17m).”’
Then, at para 39, reporting on the benefit of structuring the sale as a TOGC, the adviser stated:
‘Setting up the deal this way, [the purchasers] will obtain a cash-flow saving of not having to finance the payment and recovery of £17m of VAT. The SDLT with VAT being charged is £4.08m. The SDLT with the benefit of a TOGC is £3.4m equating to a saving of £680,000.’
In the same email to the purchasers, the adviser also pre-empted the matter about rental payments on the tenant lease in the following terms:
‘[The purchasers] will have to reimburse [tenant] the rent but I suggest we add the rent without saying so specifically to development adviser fee.’
At para 66, in relation to property development, HMRC submitted that the intention of the parties to a transaction was relevant to determining what had been transferred and, in particular, how the assets were to be used by the transferee:
‘In the present case, [vendor]’s initial response to HMRC’s disclosure request did not disclose the email correspondence between seller and purchaser during the negotiation process before the exchange of contracts. It was upon HMRC’s repeated request that the series of communications was disclosed which make clear that that [tenant] lease was entered into for the purpose of achieving TOGC.’
The judge found that the letting business was contrived and that the property was an investment property, rather than part of a development business. The judge repeatedly drew on statements made by the advisers and the parties in their private correspondence when determining the genuine intentions of the parties as being neither a development business nor a letting business, but the simple sale of a freehold property under an option to tax. The TOGC therefore failed, with consequences expected to include a fresh VAT liability, additional SDLT, plus penalties and interest.
Businesses can plan their tax affairs efficiently, but this should not be at the expense of the substance of the arrangements which are put in place. The line between genuine and artificial can be thin and care is required not only in what actions are implemented but also in how they are discussed and planned.
Advisers and businesses should take care over their communications, on the expectation that a judge might one day review them. This should not deter businesses and their advisers from putting decisions in writing at an early stage; in fact, this is important in later evidencing such decisions to HMRC and tribunals alike. It is however advisable, when discussing matters, to be aware that the texts could come before HMRC or a tribunal and the genuine substance of the business and its intentions should be adopted and reflected throughout.
If you were ever told to watch your words as a child, perhaps it was simply sound advice from a VAT adviser!
- Details of the business’s and its advisers’ private correspondence were fundamental to HMRC winning the appeal.
- Transfers of a going concern can be awkward as there are many undefined requirements to fulfil.
- Businesses’ tax planning should not be at the expense of the substance of the arrangements put in place.
This article was first published by Taxation magazine on 9 February 2023.