Selling a tenanted commercial property without VAT: the conditions, and the deposit clause that decides them
Sell a let commercial property with its tenants and the sale can fall outside VAT entirely, as the transfer of a going concern. The saving is not only cash flow on the VAT: stamp duty is charged on the VAT-inclusive price, so on a £2m opted building in England the difference is £20,000 of tax nobody ever gets back. The conditions are strict, the deadline is often exchange rather than completion, and which of the two it is depends on one word in the deposit clause.
It is not an election, and it is not optional
Article 5 of the Value Added Tax (Special Provisions) Order 1995 provides that the transfer of a business as a going concern is treated as neither a supply of goods nor a supply of services. A property that is let, sold with the benefit of the leases, is the transfer of a property rental business, and HMRC has accepted that for many years. The first thing to be clear about is that none of this is something the parties choose. The rules are mandatory. A contract clause in which the parties agree to treat the sale as a going concern has no effect on the VAT analysis whatever, though it has a great deal of effect on who carries the risk when the analysis turns out otherwise. A point of vocabulary is worth settling too, because it is misquoted constantly. Section 49 of the Value Added Tax Act 1994 is often cited as the provision that makes a going concern free of VAT. It does not do that. Section 49 deals with continuity of registration and with records. The removal of the supply is article 5.
The general conditions
The assets must be used by the buyer in carrying on the same kind of business as the seller. There must be no significant break in trading. The buyer must be registered for VAT, or become registered as a result of the transfer. Where only part of a business is transferred, that part must be capable of separate operation. And there must not be a series of immediately consecutive transfers of the business, which is the condition that bites where a property is sub-sold or passes through a chain on the same day. Applied to a let building, that means the leases have to come across, and the tenancy needs to be formalised in a lease or agreement rather than resting on tolerated occupation. Two assumptions commonly get this wrong in opposite directions. The proportion of the building that is let is not the test: HMRC says in terms that the percentage occupied is not a factor, subject only to a level so small as to be negligible. And a building being actively marketed in search of a tenant is HMRC's own example of a rental business not yet being carried on. It is having secured a tenant, or at least a contractual agreement for lease, that evidences the business. That is the reverse of what most people assume, and it matters most on a newly completed building.
The extra conditions when the property is standard-rated
Where the sale would be standard-rated but for the going concern treatment, article 5 imposes further conditions, and this is where transactions fail. Two cases engage them. The first is a grant that would be exempt but for an option to tax exercised by the seller or a relevant associate of the seller. The second is the grant of a freehold falling within paragraph (a) of item 1 of Group 1 of Schedule 9 to the Value Added Tax Act 1994, and that paragraph is wider than most people remember: it catches a building that has not been completed as well as a building completed less than three years ago, and it catches uncompleted and new civil engineering works on the same footing. A seller of a part-built but partly let property is inside these conditions, not outside them. In either case three things must be true, and all of them by the relevant date. The buyer must have exercised an option to tax that has effect on the relevant date. Notification of that option must have been made to HMRC. And the buyer must have notified the seller that article 5(2B) does not apply to it. That third requirement is the one most often forgotten. It is a communication to the counterparty, in no prescribed form, and it is a statutory condition rather than a matter of contract. Article 5(2B) itself applies only where two things are true together: the asset would be a capital goods scheme item in the buyer's hands, and the buyer's supplies of it would be exempt by virtue of the anti-avoidance rule in paragraph 12 of Schedule 10, which disapplies an option where the buyer or a person connected with it, or its development financier, will occupy the property otherwise than for substantially taxable purposes. The capital item limb has become decisive, because the threshold for it rose from GBP 250,000 to GBP 600,000 excluding VAT on 29 July 2026, so on an acquisition below that figure article 5(2B) will often not apply at all, though an item already inside the scheme under the old threshold stays inside until its adjustment period ends. The notification to the seller is required either way. Two refinements are worth carrying. Notification on time is not enough on its own, because the option must have effect on the relevant date, so an option notified within the deadline but expressed to run from a later date fails. And where the notice has been missed, HMRC's published position is that if the parties can satisfactorily evidence that article 5(2B) did not apply at the time, so that the notification could have been given, HMRC will accept the requirement as complied with. That is administrative practice rather than a right, and it is no substitute for obtaining the notice.
The relevant date is usually not completion
Everything above hangs on the relevant date, and the most expensive assumption in this area is that it means completion. It does not. It is the earliest date on which the grant would have been treated as made, which is a time of supply question, and where there is more than one such date it is the earliest of them. A deposit received by the seller, or by somebody acting as the seller's agent, creates a tax point on receipt. So a deposit paid to the seller's solicitor as agent on exchange fixes the relevant date at exchange, and everything the buyer has to do must already have been done by then. A deposit held by an independent stakeholder creates no tax point until the money is released to the seller, which pushes the date out to completion. At auction, where the auctioneer holds as agent for the seller, the relevant date is the fall of the hammer. Take a GBP 2,000,000 sale with a 10 per cent deposit paid on exchange on 1 October 2026 and completion on 1 December, by way of illustration. If the deposit goes to the seller's solicitor as agent, the buyer's option must be exercised, effective, notified to HMRC and notified to the seller by 1 October. If it goes to an independent stakeholder, the buyer has until 1 December. Same contract, same money, same parties, and the difference is a single word describing the capacity in which the deposit is held. Once the conditions have failed at the deposit, the rest of the consideration follows, even where everything is in order by the time the balance is paid.
What failure costs
Stay with that GBP 2,000,000 let office building, and assume it is in England and that the seller has opted to tax. If the going concern conditions are met, no VAT arises and the chargeable consideration for stamp duty land tax is GBP 2,000,000, giving tax of GBP 89,500. If the conditions fail, VAT of GBP 400,000 becomes due and forms part of the chargeable consideration, so the tax is computed on GBP 2,400,000 and comes to GBP 109,500. The difference is GBP 20,000, being 5 per cent of the VAT, and it is permanent: a fully taxable buyer who recovers every penny of the GBP 400,000 does not get the stamp duty back. Add the cost of funding GBP 400,000 for a quarter, and, if HMRC assesses the seller later, late payment interest at base rate plus four percentage points and the possibility of a penalty. Those are the England and Northern Ireland rates. A Scottish property pays land and buildings transaction tax and a Welsh property pays land transaction tax, each on its own bands, and because the top Welsh non-residential band is 6 per cent the same failure in Wales costs GBP 24,000 rather than GBP 20,000. There is a relieving rule that people reach for here and it does not help. VAT is left out of the chargeable consideration only where it is chargeable by virtue of an option made after the effective date of the transaction. On a failed going concern the tax is chargeable by virtue of the seller's option, which was in place long before, or under the new building rule, where no option is involved at all.
Five things people believe that are not so
That a sale to a sitting tenant can never qualify. The exclusion applies where the tenant leases the whole premises, so the rental business ends on a surrender. A buyer who is one of several tenants, taking the freehold with the benefit of the other leases, is squarely within the rules, and HMRC's own example has a buyer already occupying under a lease of 30 per cent of the building. That a buyer who intends to redevelop cannot qualify. HMRC's worked examples accept going concern treatment on a largely derelict site where both parties intend redevelopment, provided it is evidenced, and accept that a buyer intending a different business later still qualifies where it continues the old one initially. HMRC declines to set a minimum period. That the seller must part with its entire interest. That was HMRC's position before the Robinson Family decision in 2012 and it is not the position now: a long lease granted out of a retained freehold can qualify where the retained reversion is small, and HMRC treats a value of no more than 1 per cent as strongly indicative that it is small enough. Measure that against the value of the property transferred immediately before the transfer, disregarding mortgages, and apply it property by property rather than across a portfolio. The 1 per cent figure appears nowhere in the legislation. That a single tenant is too few. Nothing supports that, and a single let building with the lease passing is the paradigm case. And that a new building being standard-rated on a freehold sale means a lease of it is too. The three year rule catches only the grant of the freehold, and completion for that purpose is the earlier of the architect's certificate of practical completion and first full occupation, so a building occupied before its certificate started its clock on occupation.
If it goes wrong, the two directions are not symmetrical
If the seller treats the sale as a going concern and it was not one, the seller is liable to HMRC for the output tax. But where the seller obtained the buyer's notification and complied with everything else, HMRC's guidance says it will not seek output tax from the seller if that notification later proves incorrect, unless the seller was complicit in it. That is a strong practical reason to collect the notice rather than to accept an assurance. If instead the seller charges VAT on a transaction that was a going concern, the buyer cannot recover it. There is no supply, so there is no input tax, and no invoice can create one, even where the buyer paid in good faith. The ordinary remedy here is against the seller rather than HMRC: the seller has to cancel the tax invoice, normally by credit note, and refund the money. HMRC does operate an exceptional practice under which it may not pursue the point, but it requires the seller both to have declared and to have paid the amount, requires HMRC to be wholly satisfied, and is unavailable where returns are outstanding. It is not a right and it is not a plan.
What to settle before exchange
Almost all of the protection has to be in place before exchange, because on the ordinary deposit arrangement exchange is the deadline. What follows is market practice rather than law, but it is what experienced practitioners do. Express the price exclusive of VAT, with a clause obliging the buyer to pay any VAT properly due against a valid invoice, because the price is otherwise treated as VAT-inclusive and the seller bears it. Take a buyer's warranty that it is registered, has opted with effect from the relevant date, has notified HMRC, and will give the further notice, backed by production of the notification and the automated receipt before exchange rather than after it. Specify in the deposit clause that the deposit is held by an independent stakeholder, unless there is a reason to want the earlier date. Require the seller to hand over capital goods scheme particulars, since on a going concern the buyer inherits any capital item and its remaining adjustment intervals and is treated as having done everything the seller did. And take an indemnity covering stamp duty, interest and penalties, since those are the costs that survive even when the VAT itself is eventually recovered.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.