A fantastic result for one of our clients

The client was engaged in a business reorganisation and transferred property from company A (A) to company B (B) for no consideration. In the course of an audit, HMRC ruled that a deemed supply at open market value arose (A had paid and reclaimed input VAT on the purchase). B had not opted to tax and had no recovery right except, perhaps, under the Capital Goods Scheme (70% recovery spread over 7 years). Therefore, there was an immediate cost of £1,000,000.00 (VAT on the value of the property transfer.

Constable VAT’s Solution

We presented a very technical argument based on VAT legislation which states that where the benefit of the consideration for any property grant accrues to someone other than the party making the grant, then the person receiving that consideration is deemed to make the grant. The reorganisation involved share transfers such that we were able to argue that the transfer was not for nil consideration but was instead for the original shareholders of B to transfer shares. Furthermore, the beneficiary of the transfer was not A and had never made an option to tax. Therefore, HMRC had no legal power to raise an assessment on A. This determined an immediate saving of £1,000,000.00.

Illustrative Points

In this case, taking a few simple steps before the transfers would have removed all risk. For example, A and B could have been VAT group registered or B could have opted to tax.

HMRC never formally agreed the legal analysis offered (they simply never raised an assessment). Our suspicion is that HMRC disliked the legal analysis we offered simply because it effectively opened a route to VAT free property transfers as part of an aggressive avoidance scheme. In this instance the client was most certainly not involved in avoidance, it simply failed to consider the VAT consequences of its actions).

As Constable VAT does not actively engage in any VAT avoidance, we have never dealt with a case in which the transactions described have been deliberately created. However, we would expect the outcome we delivered to be achievable in the context of an avoidance scheme.

HMRC has many powers to combat avoidance and we doubt the outcome we determined could have been achieved by any business that intended to run these arguments from the outset as a deliberate avoidance scheme. We delivered a very large tax saving as a result of our imaginative application of the law to the facts we were presented with. Otherwise we suspect HMRC would have found a way to challenge the outcome, or at the very least, would have tried to do so!