A new tribunal case throws fresh light on the need to take a careful and considered approach to real estate dealings - and not to rely on an overly-mechanistic interpretation of VAT law and HMRC guidance. But, as happens all too often with VAT case law, it raises as many questions as it answers.

In HMRC v Royal College of Paediatrics and Child Health et al. [2015] UKUT 0038 (TCC), the Upper Tax Tribunal considered a situation where - while there was no assertion of abuse of VAT law - there were strong intimations of artificiality to obtain a VAT advantage. There are two important findings in the case. The most crucial for the College itself is that HMRC was out of time to assess VAT in any event. However, the Upper Tribunal's comments in relation to VAT on property transactions - because they create binding precedent - give important insights in relation to this high-risk area.

The facts of the case are as follows. The College wanted to buy a property that it would occupy. Its seller had made an option to tax in relation to the property, meaning VAT would have been due on its purchase. So the College explored with its seller whether that default position could be overridden - specifically by means of what is now commonly known as "TOGC" treatment - which would have rendered the sale VAT-free. This is appealing to all purchasers who pay SDLT (as SDLT is payable on VAT paid on purchase prices), but is also appealing to bodies who cannot recover all the VAT that they incur.

"TOGC" originally stood for 'transfer of a going concern', but in modern VAT parlance is actually shorthand for "a transfer of a going concern that has met the conditions for it to be VAT-free". Almost all business transfers can be a transfer of a going concern (which impacts on the VAT registration and record-keeping obligations of the transferor and transferee) - but not all transfers of going concerns then go on to meet the conditions to be a TOGC (and so become VAT-free). Those conditions seek to prevent both the avoidance of tax and the distortion of competition that VAT-free status could give.

The TOGC conditions are particularly exacting for real estate-related transfers of going concerns, but were not discussed in this case. Rather, the question was whether or not there was ever a "going concern" to have "transfer of" in the first place.

The sale of a property rental business can be a transfer of a business as a going concern, because it is widely accepted that (as an income-generating asset) a let, rent-bearing property is a business. It is also widely accepted that the property need not be subject to an actual lease: it suffices that the seller has found a tenant and that a legally-binding agreement for lease has been entered into with that prospective tenant - the case of Dartford Borough Council confirms this. It is also accepted that the property need not be fully let for the whole property to be a transfer of a property letting business as a going concern. Such transfers can therefore be a VAT-free TOGC if the relevant conditions are met.

The College had a genuine reason not to want to pay VAT that it could not recover. TOGC treatment suited the college. It may or may not have been eligible for SDLT relief (so that the SDLT-on-VAT liability was not an issue for it), but it would certainly have incurred a significant amount of VAT (more than £3 million) - not all of which it could recover.

To that end, the College introduced an 'affiliated' party of the College to the seller, and invited the seller to enter into an agreement for lease over a part of the property (in fact, just a single room in the whole building) with the affiliate. The agreement for lease had a heavy raft of conditions and triggers: it was exchanged on a conditional basis on 16 November 2007, and only became unconditional after the seller had agreed to sell the property to the College (and it fell away if the seller had not also reached agreement with the College to do so by the end of 16 November 2007). What's more, on the facts as presented, the affiliate had an extremely narrow window in which to compel the seller to grant a lease to it (if indeed, it had such right at all).

None of this had been an obstacle for the First Tier Tribunal (which found that there had been a TOGC), but the judge in the Upper Tribunal, without pointing to any specific issue, decided that a combination of factors prevented there from being a property letting business in the seller's hands.   Therefore, there was no TOGC, and VAT was due. Of the collection of issues that the Upper Tribunal raised, none was apparently sufficient to prevent the TOGC when taken on their own, but they were fatal to the analysis when viewed together.

Firstly, the Upper Tribunal focused on the degree of connection between the College and the affiliate, without ever expanding on the precise grounds of why this was problematic. In our view, this would have been much more relevant to the decision if it had meant that the College could not charge its tenants VAT (which would have been another obstacle to TOGC treatment). But this point was not explored, and nor was the minimal occupation by the affiliate.

Secondly, it was unhelpful to the buyer that they introduced the tenant to the seller, but this should not be sufficient to prevent there being a transfer of a property letting business as a going concern. Indeed, it is a common practice that institutions will have a roster of preferred tenants, (chosen for their covenant strength) and those institutions can on occasion take these to landowning developers who may be trying - and failing - to tie up a pre-let on their own.

Thirdly, and perhaps most telling, was the extent to which the business of letting could be (or more importantly could not be) enjoyed by the seller. If it only had the benefit of an agreement for lease over its property once it had committed to sell that property, then to the impartial observer it did not have a letting business of its own to sell on.

It is fair to say that this case brought together a 'perfect storm' of these three particular factors. In most commercial scenarios, there should be enough factual differences to distinguish a normal commercial deal from the one in this decision - and indeed the judge in the Upper Tribunal made this point. Tenants are seldom quite so connected to their buyer; sellers are often in the process of marketing their properties for letting even if the tenant is ultimately introduced by a third party; and documents are seldom quite so tightly conditional.

There is much that is troubling about this case. The most complex aspect of TOGCs is whether there is a business at all. This particular area is rich in overlapping but occasionally contradictory case law, and has relied on HMRC providing clarification to its often unclear (and frequently out of date) published guidance.

Evidence from HMRC at the First Tier Tribunal in this case even confirmed that HMRC refuses as a matter of policy to give rulings on TOGCs.  A thorough discourse from the Upper Tribunal, especially when it is unlikely that the point would be appealed further, would have brought more clarity.

For as long as this is there is uncertainty around these points, any contrivance or 'choreography' (to use HMRC's term) in structures securing tax advantages should continue to be viewed with care: whether to bear scrutiny in UK courts or - increasingly - in the court of popular opinion. There is a difference between robust structuring and 'clever' planning, and both 'courts' have taken strongly against the latter.