The Upper Tax Tribunal has given a judgment in the case of the Royal College of Paediatrics. This was concerned with whether the College should have been able to purchase its new HQ building as a VAT free Transfer of a Going Concern (TOGC).

The problem the College faced will be familiar to many charities. It is the typical charity VAT question. It needed to move HQ building but found that suitable buildings were opted and had VAT charged on them. Since it obtained a low VAT recovery this meant it would suffer a large additional cost. It asked its advisors if they could devise something.

The College had a subtenant in its HQ building which was a separate organisation, albeit one with similar aims. It was decided that this subtenant would enter into an agreement with the seller to lease a room in the new building prior to its sale to the College. There was debate as to the conditional nature of the tenants lease and whether the seller could demand the lease be taken if the main deal collapsed. – both Tribunals accepted they could.

Because the building was sold to the College with an intended tenant it was treated as a transfer of of going concern and no VAT charged. HMRC disagreed and assessed; the College appealed to the Tax Tribunal and won. HMRC then appealed to the Upper Tribunal.

The Upper Tribunal agreed with HMRC that it was not a TOGC as there was no business being transferred. The subtenant could not in this case be said to have been part of the sellers business since they were sourced by College. The agreement with the seller was only entered into because of the intended property sale and did not constitute a business activity of the seller which could be transferred. VAT should therefore have been chargeable on the sale of the building.

Fortunately for the College the Tribunal also found that HMRC was out of time to assess. This means the case will presumably not go further as the College has won and I assume HMRC will not want to jeopardise a useful precedent by appealing the assessment timing issue. This is rather unfortunate in a way as I am not completely convinced by the judgment.

For the charity, membership and learned society sector it is certainly not good news. Most large commercial buildings are opted to tax and manufacturing a TOGC was a way of reducing this VAT hit. As the case was decided on its facts it is of course possible that another Upper Tribunal appeal might ultimately lead to a different result if the agreements and other facts were different – but there’s no guarantee. But a charity considering a similar approach should think very carefully. I suspect that property owners will now think very very carefully before agreeing to such an arrangement.

Of course if you were to buy a building with genuine subtenants, sourced by the seller and in place at the time of transfer, the sale could still be a TOGC. The judgment does not stop genuine property TOGC’s. But if you are a charity intending to move its a question of finding such a building.

The judgment can be found at: http://www.tribunals.gov.uk/financeandtax/Documents/decisions/HMRC-v-Royal-College-Paediatrics-and-Child-Healthcare-Coleridge-Theobalds-Rd-ltd.pdf