On 15 January 2008, The Royal College of Paediatricians and Child Heath (the College) completed the purchase of a freehold building in central London from Coleridge (Theobalds Road) Limited (Coleridge) for £17,445,000.
Prior to this transfer, Coleridge had made an option to tax in relation to the property and so (in the absence of TOGC treatment), a significant VAT charge would arise, which would be largely irrecoverable in the hands of the College because of its exempt and non-business activities. Accordingly, the parties sought tax advice to try to achieve a VAT efficient structure.
The relevant facts were as follows:
- Before acquiring the property the College occupied another building which was partially let to two other organisations.
- These two organisations wanted to remain as tenants of the College.
- Accordingly, the College’s tax advisers proposed that at least one of these organisations enter into an agreement for lease with Coleridge prior to the agreement for the freehold transfer (such that the agreement for lease, and the grant of the lease pursuant to its terms, were conditional upon exchange of the agreement to transfer the freehold interest to the College).
- On 16 November 2007 the College and Coleridge exchanged the agreement for the freehold transfer (and the agreements for lease became unconditional at this point).
- The sale of the freehold to the College was completed on 15 January 2008.
- On 20 March and 11 May, two leases were granted to the occupational organisations by the College on the terms outlined in the agreements for lease.
The parties considered that this structure resulted in the transfer being a TOGC (because the property transfer was completed subject to unconditional agreements for lease). This accorded with the relevant HMRC guidance, in particular paragraph 7.2 of Notice 700/9, that the transfer of a property subject to an agreement for lease can take effect as the transfer of a property rental business.
HMRC disagreed, and described the arrangements as a “carefully planned […] choreographed exchange of documents”. In essence, HMRC’s argument was that Coleridge had no property rental business to transfer and the whole exercise was commercially artificial. The prospective tenants had been introduced to Coleridge by the College and unless the freehold transfer took effect, the agreements for lease would never come into existence.
The Tax Tribunal had little difficulty in rejecting HMRC’s argument and concluding that the transaction was a TOGC. In fact, Coleridge was a VAT registered property company that owns a very significant asset (the freehold property), and it was actively engaged in marketing that asset to prospective tenants at the time it began negotiations with the College. It was simply false to assert, as HMRC did, that Coleridge did not intend to exploit the property for economic purposes. It had let the property in the past to tenants, prior to terminating those leases to refurbish the property, and had been seeking new tenants (though was willing to sell the freehold to the College).
The Tax Tribunal also noted that, once the College and Coleridge had exchanged the agreement to transfer the freehold interest, the agreements for lease became unconditional. If the freehold transfer had never completed, Coleridge would have been compelled to grant the occupational leases to the prospective tenants. When the freehold property was transferred to the College, it was transferred subject to an obligation on the College to grant the occupational leases. This represented the transfer of a property rental business, and qualified for TOGC treatment.