Letting buildings as part of a TOGC

The General Court of the European Court of Justice has held that the grant of a lease by a person transferring their business as a going concern to the person taking over that business does not form part of that TOGC for VAT purposes: A&P Deco NV v Belgishce Staat (Case T-397/25). As such, the transferor was obliged to adjust input VAT previously recovered in relation to the renovation of buildings subject to the lease under the capital goods scheme.

Background

The case concerns the sale of a garden centre by A&P to a purchaser which took over and continued the taxable business. The buildings from which the business was conducted were renovated by A&P between 2008 and 2011 and A&P deducted input VAT on those renovations. As a result, the buildings were part of the capital goods scheme (CGS) subject to an adjustment period of fifteen years.

In 2013, A&P sold the business as a going concern. However, rather than selling the buildings, it entered into a VAT exempt lease of those buildings with the purchaser of the business. The Belgian tax authorities sought to adjust the input VAT originally deducted in relation to the renovation of the buildings as a result of the change of use of those buildings (from use within a taxable business to use for exempt letting). A&P appealed the resulting assessments, arguing that the letting of the buildings was part of the TOGC and as such ignored for VAT purposes.

In particular, the taxpayer pointed to the CJEU decision in Schriever (Case C-444/10) in which it was held that the transfer of the assets of a business along with the letting of the building to the transferee amounted to a TOGC. On that basis, the taxpayer argued that the letting of the garden centre building in this case was effectively part of the TOGC which required that transfer to be ignored for VAT purposes. As the transfer was to be ignored, it could not affect the CGS calculation.

Moreover, the taxpayer argued that the effect of the TOGC was to put the transferee in the shoes of the transferor such that any CGS adjustment should be calculated by reference to the transferee's use of the building. That use continued to be use as a commercial building for the making of taxable supplies.

Decision of the General Court

The Court has noted that the adjustment mechanism within the capital goods scheme is "an integral part of the VAT deduction scheme, is intended to enhance the precision of deductions so as to ensure the neutrality of VAT". As such, in principle, it was clear that where input VAT has been fully deducted on the renovation of buildings used in a taxable business and those buildings are later (within the adjustment period). used to make exempt supplies of letting, then an adjustment is needed.

The Court has also held that that position is not called into question by the TOGC provisions. Whilst it was clear that the conditions for a TOGC can be met where the relevant property is made available for the business to be carried on by way of a lease (rather than sale), that does not make the letting itself part of the transfer. A letting right can only form part of the transfer if it exists prior to the transfer and is transferred as an intangible element of the business. "By contrast, where the transferor creates a new lease as part of the transaction, there is no pre-existing right to be transferred and the grant of the new lease cannot be regarded as forming part of the totality of assets transferred as part of the TOGC.

As a result, since the grant of the new lease dd not form part of the TOGC, it was not ignored and must be taken into account for the purposes of the capital goods scheme adjustment calculation. The Court noted that if the initial deduction were to be granted in this case and not adjusted for following the grant of the exempt lease, then that fact would undermine the principle of neutrality of the VAT system.

Comment

The Court had previously held in Schriever (Case C-444/10) that, if an economic activity requires premises, the transfer of the totality of assets necessary to carry on that business as a going concern can be achieved where the premises are made available by a lease. However, that decision did not deal specifically with the VAT position of the lease itself. This decision in A&P Deco now makes it clear that the grant of the lease itself is not part of the TOGC and may, as here, result in a need to adjust input VAT previously reclaimed under the capital goods scheme.

It might be questioned whether the decision of the General Court that the grant of a new lease may not be part of a TOGC affects the decision in Robinson Family Ltd, where in 2012 the FTT concluded that the grant of a lease for a premium, retaining only a nominal reversion, was in substance a 'transfer' and a TOGC. Quite apart from the fact that the decision is no longer binding in the UK, there are other reasons to distinguish the A&P Deco case from the situation in Robinson Family. Firstly, the lease in A&P Deco appears to have been a short, commercial lease, merely transferring use of the property, rather than any long-term ownership. Secondly, the business in Robinson Family Ltd was essentially the rental business deriving from the rights to rents etc under the underlying occupational leases and these rights (and that business) were effectively transferred by the grant of the intermediate lease.