TOGCs and property development and letting businesses

The FTT has held that the sale of a property with the benefit of planning permission and with short term leases for the buyer's contractors did not amount to a TOGC: Haymarket Media Group Ltd v HMRC [2022] UKFTT 00168. The FTT rejected the taxpayer's contention that the sale was of a property development or property letting business.

The decision indicates that that it is necessary to apply the concept of economic and commercial reality to the question whether a business has been transferred or the transfer is merely of an asset. Since the intention all along was to transfer the freehold of the site with vacant possession so the buyer could carry out the development itself, there was no transfer of either a property development business or property letting business from the seller.

Background

Haymarket was the long-term owner of a building in Teddington, which it both used for its own business purposes and rented to tenants. Around 2014, it decided to seek planning permission for the redevelopment of the Teddington property with a view to selling it. The planning application process took 18 months and cost around £870,000 in consultancy fees and was ultimately successful. Haymarket then advertised the property for sale as a freehold property with the benefit of planning permission and vacant possession.

During negotiations with the eventual buyer, Pinenorth, it became clear that the buyer would prefer to structure the sale as a TOGC to save both the cash flow cost of funding the VAT and reduce SDLT. Advice was sought which indicated that rental arrangements with Pinenorth's advisers of part of the site to be used as a marketing suite and Pinenorth's demolition and construction contractors should be sufficient to bring the sale within the TOGC provisions. In the event, HMRC disagreed that the sale amounted to a TOGC and Haymarket appealed.

Decision of the FTT

Haymarket contended that the sale of the Teddington site amounted to a TOGC either on the basis that:

• It amounted to the transfer of a property development business (arguing that the time and cost involved in acquiring the planning permission amounted to an economic activity) or
• It amounted to the transfer of a property letting business (based on the leases to Pinenorth's advisors and contractors).

The FTT has rejected both of those arguments. As regards the property development business, the FTT concluded that it was clear that (a) Haymarket never intended to carry on a property development business, it always intended to sell the property with the benefit of planning permission and (b) the parties never intended there to be the transfer of a property development business. It was clear from the contractual arrangements that Pinenorth was simply buying the freehold of the Teddington site to redevelop itself. What Haymarket had done was to obtain planning consent, which was a step which may enable development to take place, but it was not active development in itself.

On the question of the property letting business, the FTT concluded that this argument was even weaker. Firstly, the property was always advertised as being sold with vacant possession and that remained the substance of the transaction throughout. As regards the two leases in place:

• The lease to Pinenorth's advisers was only entered into as an attempt to secure TOGC treatment, the advisers insisted that they be reimbursed the rents and Pinenorth did not charge them any rents after the sale went through.
• The lease to Pinenorth's contractors was to enable pre-demolition work to take place, was granted only 3 days before completion and Haymarket rendered one invoice for a 14-day period of which it was entitled to only 3 days.

The FTT noted that the commercial reality is that Pinenorth did not want any true tenants from Haymarket. The putative tenants at the date of completion were connected to the purchaser, and that reflected the economic and commercial reality that Pinenorth  simply could not afford the risk of taking over any true tenants from Haymarket, which could possibly obstruct its title with vacant possession of the whole Teddington Site as the developer. The FTT noted that similar arrangements in HMRC v Royal College of Paediatrics and Child Health [2015] STC 1243 failed. "The critical feature of the special relationship between the putative tenants and the purchaser is fatal to the argument that there could have been a TOGC as a property lettings business."

Finally, although the form of the contract as entered into by Haymarket and Pinenorth was structured as a TOGC, the FTT noted that the label adopted by the parties is not conclusive for the purpose of characterising the transaction. The substance of the transaction means the economic reality of what was being transferred and that involves consideration of 'the nature of the transactions carried out in the particular case'. It was the economic reality of whether the transfer of the Teddington Site by Haymarket fell within the concepts of a transfer of a property development or property letting business that was determinative, and that was not the case here.

Comments

The decision indicates that that it is necessary to apply the concept of economic and commercial reality to the question of whether a business has been transferred or the transfer is merely of an asset. Just obtaining planning permission does not amount to a property development business, even if though it is a necessary step in developing a property - at least where the property owner has no intention to carry out the development itself. Equally, the fact that a property is transferred subject to leases is unlikely to establish that the seller has, in commercial and economic reality, transferred a property letting business to the buyer where the leases are granted at or shortly before completion to persons having some special relationship with the buyer – especially where this is merely to secure TOGC treatment.