RP Case Study: Transfer of a going concern

In the complex world of payable VAT on property purchase through SIPPs and SSASs, what role does a 'transfer of a going concern' play? Stephen McPhillips takes a look

As an experienced pension adviser, Sarah was familiar with the advantages of commercial property purchase through self-invested personal pensions (SIPPs) and small self-administered schemes (SSAS). However, when Jo, one of Sarah’s longstanding clients, called her to chat through a potential new purchase she wanted to make through her SIPP, Sarah knew this one was not going to be quite as straightforward as the other cases she had handled.

Jo had mentioned the term “VAT” (Value Added Tax) early on in the conversation and had taken care to establish with the vendor of the property that it had been “elected for VAT”, which in turn meant that VAT may need to be paid on the purchase price. Sarah was a little worried because she knew that overall funding of the commercial property purchase was going to be very tight.

Sarah knew that while Jo had sufficient cash within her SIPP to cover the purchase price and associated costs, the burden of an additional 20% charge on top of the purchase price would render the purchase unaffordable for Jo’s SIPP – even though it could be reclaimed at a later date. Sarah had also recalled from speaking to one of her trusted SIPP providers that, should VAT be payable on the purchase price, the Stamp Duty Land Tax (SDLT) liability would be based on the purchase price plus VAT – effectively a tax on a tax.

During the conversation, Sarah established from Jo that she did not wish her SIPP to borrow any funds and she did not want to commit any further contributions to it because she knew these would be locked away until she reached age 55. In addition, she had already paid significant contributions into the SIPP in recent years to build up the funds for the purchase and she needed to retain savings for a personal house purchase.

Jo also told Sarah that she really wanted her SIPP to buy the property outright and that she didn’t want to go down a ‘tried and tested’ joint purchase route, which Sarah had mentioned was a possible option.

On the face of it then, Jo felt she had a problem. She really wanted to make the commercial property purchase through her SIPP but didn’t quite have the funds with which to do it in the manner she desired.

During the conversation, Sarah had asked Jo why she liked this commercial property in particular. Jo explained that the property was in a prime high street location and that it was leased to a long term tenant who had a track record of paying rent consistently on time. Excitedly, Sarah asked Jo if the tenant would be remaining in place under the existing lease after the SIPP had bought the property. Jo confirmed this to be the case.

Sarah was delighted to explain to Jo that this might mean that the vendor would not need to charge VAT on the sale/purchase price. In addition, the SDLT liability would be lower than it would have been, had VAT been payable.

Sarah stressed that Jo should seek specialist VAT advice on the matter, but that this particular purchase may qualify as a ‘transfer of a going concern’ (TOGC). Sarah explained that, under the conditions of a TOGC, the business of leasing out a commercial property doesn’t change from one owner to another – a “going concern” – and that VAT does not need to be charged on the sale price. She further explained that the presence of a tenant with a lease pre and post SIPP purchase is one of the main criteria for a TOGC to apply, although there are other conditions. Sarah confirmed that for the TOGC to apply, the SIPP trustees would have to register for VAT and opt to tax the property.

Jo was relieved that she had called Sarah at an early stage of the process and immediately called her solicitor to move things forward.

Stephen McPhillips is technical sales director at Dentons Pension Management