Claiming VAT on professional fees for sale of commercial property as a TOGC

[plastics77]

Hi, recently sold a commercial property (income generating hotel room) as a TOGC – would welcome some advice – tried ringing HMRC VAT, emailed them with an enquiry 3 weeks ago, but still haven’t heard anything – even tried waiting for a live chat link on teh website, but it never pops up, clearly they are very busy!

My next VAT quarter return (and presumably final one) is due end of September, for the period 1st June to 31st August – however the property was sold 2nd July, so the room was owned by a different vat-registered owner for the July/Aug period.

Do I fill this VAT return in as normal for the whole period and just submit my figures for June or for the whole period?

Do I put my claim for the VAT on the legal and agent fees on the sale in Box 4 (VAT reclaimed in this period on purchases and other inputs) and then the actual figures excl VAT in Box 7 (Total value of purchases and all other inputs excluding any VAT)?

Once submitted do I then de-register and cancel the registration – is there a time limit to do this from the time of selling the property?
Or do I proceed with de-registering, ignore the routine VAT return above, and just complete a ‘final VAT return’ upto 2nd July (i.e. one month of the quarter) and make claims via VAT 427?

[Trevor S]

Hi – there’s two aspects to your question!  I’ve included a number of links below – the majority are to HMRC internal guidance.  This is written primarily for HMRC staff, so where the text says “you”, it actually means “them”!  But it shows the processes and considerations which they should be following.

TOGC – I’m assuming that all of the conditions for the transaction to be treated as a TOGC were met, and so no VAT was declared on the income that you received.

Under VAT law, a TOGC is deemed to be neither a supply of goods not services (see https://www.gov.uk/hmrc-internal-manuals/vat-transfer-of-a-going-concern/vtogc1100). This means that the VAT incurred in connection with the transfer is not attributable to the transfer, but is instead regarded as a general business expense (see https://www.gov.uk/hmrc-internal-manuals/vat-transfer-of-a-going-concern/vtogc4200). Therefore if your business was entitled to recover VAT in full on it’s normal business expenses, it will be entitled to reclaim the VAT on costs relating to the TOGC.

Deregistration – Does your business make any other taxable supplies?

If not, then you must notify HMRC that taxable activity has ceased (see https://www.gov.uk/hmrc-internal-manuals/vat-deregistration/vatdreg03000). There is a time limit of 30 days from the date at which you ceased to be eligible for registration (see https://www.gov.uk/hmrc-internal-manuals/vat-deregistration/vatdreg06000), and you could be liable to a penalty if this isn’t met. Arguably your taxable activity would have ceased at the point of the TOGC.  However HMRC can then defer deregistration for up to 6 months where there are assets to be sold or costs that have yet to be billed (see https://www.gov.uk/hmrc-internal-manuals/vat-deregistration/vatdreg13000) – this should allow most remaining VAT declarations to be made on the normal returns, rather than via a VAT427.

If you have now missed that deadline, you should notify HMRC straight away, and explain that you have been trying unsuccessfully to contact them for clarification. Any penalty for late notification would be issued under section 69 of the VAT Act 1994 (see https://www.legislation.gov.uk/ukpga/1994/23/section/69), subsection 8 of which allows for the penalty to be waived if HMRC are satisfied that there is a “reasonable excuse” for the late notification.

If your business does still make other taxable supplies (this might include the sale of goods if your business had any assets that were not transferred as part of the TOGC and will now be sold separately), but you know that the value of those supplies will fall below the VAT deregistration threshold, you can voluntarily deregister (see https://www.gov.uk/hmrc-internal-manuals/vat-deregistration/vatdreg02050). As this is done by choice, there is in practice no time limit. But you must continue to charge VAT on any taxable supplies that you make prior to the effective date of your deregistration.

[plastics77]

Hi Trevor, firstly thank you very much for your clear and detailed reply – it has taken me a while to log back into this site for some reason so have not been able to read responses to my post.
Just to provide some context – we naively bought an apartment hotel suite in a hotel room as an investment a long time ago – we were given a guaranteed income per month for the room and the hotel management would also provide us the figures to submit every quarter for our VAT return, but paid the VAT to HMRC directly on our behalf (and for all other hotel room owners). We became VAT registered simply for this hotel room investment, and have no other taxable supplies or business related to this VAT registration. We managed to find a buyer earlier this year and sold the hotel room unit 2nd July and did not charge VAT on it as both we and the purchaser met the TOGC criteria (purchaser carrying on with the same business – i.e. income from the hotel room, VAT registered and opted to tax).

We were advised (clearly wrongly) that there was no rush to de-register – just complete the next normal VAT return due for the period Jun-Aug and claim your transaction costs for this sale (basically VAT on the legal and agent fees) within that return in the appropriate box – submission of this return is due end of this month/first week of October. Then de-register after that. I can see now that we could have de-registered and then completed the final return to the date of the sale (2nd July) even though it was partway in the-quarter? The figures would be easy, as the hotel management has retained all income since the covid pandemic, so we have been submitting nil VAT returns since the beginning of last year. So our final vat return would be nil again, except for the claim on the VAT for the professional fees for the sale of the hotel room.

However, we are now in what seems a more complicated position as the hotel management a few weeks ago decided to pay hotel room owners the income generated from their rooms in 1st Quarter 2020 into our accounts now, in the middle of this quarter, post-sale – we enquired whether we should therefore be amending the VAT return for that 2020 quarter that this income relates to – and we were told, no, the VAT figures related to this income will be provided to us for submission for this next Jul-Aug return, as the invoice was raised in August

So I am utterly confused and tearing my hair out- we have received Q1 2020 income now post-sale of the unit, we need to fill in the next VAT return Jun-Aug by first week of October – this will contain figures related to this invoice, but our ownership of the unit ended 2nd July. 

So is the easiest thing to do now – deregister, write a note explaining what has happened and then claim for the professional fee VAT costs via VAT427 – if we deregister do we even have the facility to fill in the next normal (Jun-Aug) VAT return in any case – presumably not- or do we have to deregister and ask them for this 6 month grace period to make the declarations for this next VAT return and then submit a ‘final return’ after that. 

Nearly 6 weeks on, and I still have not received a reply from HMRC that I sent on 27th July, which is so frustrating when we are desparately seeking clarity to do the right thing!

[Trevor S]

Hi – not sure what is happening with this site – I couldn’t get into it for a while, and now I’m seeing different versions of it depending on what browser I’m using! So hopefully this reply will get through, and you’ll be able to see it…

I hadn’t considered a management company in my previous reply. They are (probably) right, in that if they’re issuing a “self-billing” invoice to you with a payment, the tax point of your transaction is that shown on their invoice – later than the date you sold the room.

If that is the final invoice, then technically the time limit for de-registering would start from then – as that is the point at which you know that you’ll no longer have taxable business income. Although if you’ve been trying to get replies from HMRC since late July (and you’ve got evidence of this), it would be good justification if it turns out that you’ve missed a deadline. But you should now contact them and notify them that your taxable activity has ceased.

You then have two options. You could ask them to defer the deregistration for the six months and submit the next two returns as normal, assuming that you’ll have the professional fees invoice within that time. Alternatively, there’s nothing to stop you now submitting the June-Aug return straight away (you don’t need to wait until the first week of October) so that it gets through before your de-registration is processed – then you’ll just have to use the VAT427 to reclaim the VAT on the professional fees.

[plastics77]

Thanks Trevor, agree, something happens to website where you end up on an older archive section sometimes. Anyway, thank you for the reply.
So I can’t submit the end-Aug return yet as I am still awaiting the management company to provide the VAT figures (usually would be nil return during the pandemic, but as they’ve finally given us some money this quarter, will need to get the figures confirmed for this one) which they normally provide us to submit to HMRC – they then pay the VAT owed on our behalf.
I already have the professional fees invoice at the time of the sale in July (agent and legal fees). 

Few more queries, most grateful if you can clarify, as I am still confused (hopefully never getting involved with VAT again!
– when you say contact HMRC and notify them that taxable activity has ceased – do I just email/write to them, and assume they get it, as clearly I can’t wait for a reply given the timescales they are taking to reply?
– when I de-register – doesn’t that automatically notify them that my taxable activity has now ceased, or do I still need to write to them as above?
– is it possible to reclaim the VAT on the professional fees on the current Jun-Aug return i.e. put the figures in the relevant box (i.e. box 4 and 7), as the sale occurred in the quarter, and then just de-register after that?
– now if I am submitting a VAT return for this hotel unit under my VAT registration number, for period including when I was not an owner (Jul/Aug) – is that relevant/does that matter- i.e. the new owner, will he also be submitting a VAT return for the same unit with the same figures for Jun-Aug, even though he wasn’t an owner in June, but was for Jul/Aug – I don’t understand how the VAT return gets split across the handover to the new owner – or does he just submit his own return under his own registration, and it is not relevant for me?

Many thanks

[Trevor S]

HMRC’s notice 700/11 contains a link for cancelling a VAT registration online – that may be the best option. See section 2.2 for instructions. I’m assuming that the new owner will have VAT registered in their own right, rather than your registration being transferred.
https://www.gov.uk/government/publications/vat-notice-70011-cancelling-your-registration/vat-notice-70011-cancelling-your-registration#basic-information

I’ve never done a deregistration, but the guidance implies that you give the reason for deregistering (in your case, compulsory due to taxable activity having ceased) as part of the process.

Provided that the professional fees invoice is dated prior to the end of August, you can include it in the Jun-Aug return, then cancel your registration as above.

Assuming that the VAT registration number hasn’t transferred to the new owner, you shouldn’t need to be involved in their VAT return. Theirs may not be Jun-Aug anyway, different businesses’ VAT quarters end in different months. The management company will presumably only be providing you with figures covering the period up to the sale (not the end of August) and will provide figures to the new owner from the sale to whenever their VAT quarter ends.

[plastics77]

Thanks Trevor ! Yes the professional fees invoice is dated from July and the new owner has his own VAT registration number

Re. providing figures upto the point of sale – we asked that – the management company simply said ‘the submission would be for the full quarter as despite the sale of your unit, this doesn’t tie in with your return dates’
Ordinarily this wouldn’t have been issue this year, as all the returns were nil returns – and certainly to the point of sale in July it would have been a nil return – however, the fly in the ointment is the exceptional payment in August of income retained from a previous quarter of 2020 – so now the return to point of sale (2nd July) would still be a nil return, however the remainder of the two months, Jul/Aug for the Jun-Aug return, now has an income and VAT payment for boxes 1,3 and 6!
I agree, the process looks easiest to now complete the Jun-Aug return for my VAT registration, including the professional fee VAT reclaim in boxes 4 and 7, effectively like my final return, then deregister and send a note to HMRC explaining the situation.
Only conundrum is that after I deregister, and no longer exist, if the management company do decide to pay back retained income from other previous quarters of the Covid years, in the future then I can’t be paid – presumably once I am de-registered as a VAT business they cannot pay me or the VAT on my behalf…

[Trevor S]

That’s probably more of a contractual / accounting issue than a VAT one! Would it be your money anyway – or when you sold the business, did the new owner effectively buy all its assets and liabilities – including any amounts that may be due from the management company?

Realistically, you can’t keep the VAT registration open just in case the management company may decide that you’re entitled to something at some point in the future!  But if you do get income later, you’ll need to establish what the formal “tax point date” of the transaction is. That’s largely going to be down to the detail of the contractual relationship between you, the management company, the hotel (if different) and the guest(s) staying there – so not easy to advise on via a forum!  If the tax point date is during the period you were registered, then you could probably treat it as an error in the quarterly return covering the tax point date and notify HMRC. If the tax point date is after the end of your registration, you would technically need to determine whether you were liable to re-register.

[plastics77]

Thanks  makes sense! Contractually it was agreed any income related to time before completion date would be mine and any after that would be the new owner’s. Agree, can’t keep VAT registered in the unlikely event this happens again!

I think I am clear on next steps now, many thanks for your help Trevor…

[plastics77]

Ok so I finally de-registered in December, as there were still invoices being raised in the last 2 quarters, so effective date for ceasing trading was the last invoice for which income was received and for which VAT was paid. I de-registered online, however, I have received a form saying ‘our records show that you own, or have owned land or property that involve an Option to Tax’ – it then asks me to complete a ‘VAT Deregistration Option to Tax’ form which involves providing details of the property, date of purchase, date of sale, VAT reg of new owner etc.
There is something a little confusing:
There is Q4 which is straightforward ‘did you transfer the property as a going concern’ and asks for details of the new owner, date of transfer, value of property transaction
But the preceding Q3, asks ‘has the property been sold’ – state the price it sold for excl VAT, date of sale and then asks ‘on which VAT return did you declare the tax due – please enter the VAT period’  – but I didn’t declare any tax due, because I sold it as  TOGC in July, which is reflected by my answers in q4. Was I meant to have declared the theoretical VAT due in the July return and declared the property transaction value in that return? If so, I haven’t, what can I do about that now??
Thanks

[Trevor S]

Generally if a business still owns any goods at the point of deregistration, they need to account for VAT on them as part of the deregistration. Land/buildings owned are treated as goods, so (as you had opted to tax them) if you still owned them at the time of deregistration, you would have had to account for some VAT. This would be why HMRC sent out the form – to establish whether you still owned them and, if not, what had happened to them.

I haven’t seen this form before, and can’t find it online. But I’m wondering whether there’s a confusion with terminology – maybe you’re applying more of an everyday meaning to the word “sale” than HMRC are? Maybe you’re only meant to complete either question 3 or 4, not both?

TOGC is actually short for Transfer of a Business as a Going Concern. In other words, your transaction was only a TOGC because the property together with the agreements with the management company was a complete business in its own right. You need to complete question 4, but probably not question 3.

Others may own buildings which aren’t businesses in their own right. For example a company might operate out of two offices. If they decide that they no longer need one of them and sell it as empty office space, they aren’t transferring any form of “business” to the new owner, they are just selling property and would need to charge VAT on the sale. If they then deregistered for VAT, they would need to complete question 3 on the form rather than question 4.

[plastics77]

Thanks very much Trevor, that is useful. The questions are pretty much sequential and clearly signpost if you need to miss the question and move onto somewhere else – I couldn’t find the form anywhere online either, so have scanned and attached to this message. I think I might need to complete q3 but just leave that part of the question blank or n/a. I am sure they will query this if I have done it incorrectly and then I can try and explain it, or just send this back with a covering letter…

[Trevor S]

Thanks – it’s not clear is it!  I would still be tempted to leave q3 completely blank, as a “no” would send you straight on to q5 – but the “sale” details (date and value) really relate to q4. But however you do it, worth including a covering letter when you return it.

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