VAT is usually due on taxable supplies made by a VAT-registered business. VAT would also apply to transfer or sale of most assets, especially if the business has claimed VAT on these assets. But what VAT treatment applies when a business is sold and how can one avoid VAT traps when purchasing a business ?
- Selling of a business & its VAT consequences
- Selling by way of shares and its VAT consequences
- Selling by way of trade and assets and its VAT consequences
VAT implications must be given serious consideration in order to prevent a large VAT bill on completion of a business sale or purchase.
Selling of a business & its VAT consequences
A business can be sold in two ways: –
- Share sale (in case of a company),
- Selling of trade and assets of business (some or all business part).
Let’s look at VAT consequences of each method.
Selling by way of shares and its VAT consequences
The HMRC guidance confirms that the sale or transfer of existing shares or securities in the course of business activity are exempt for VAT purposes.
As selling of existing shares is an exempt supply for VAT purposes, it also affects the ability to recover the VAT charged on associated professional costs incurred while selling the business.
Therefore, in cases where the company shares are owned by an individual, recovery of any VAT is not possible on the costs incurred on professional services and it is necessary for owners to factor in the irrecoverable VAT costs.
Where the seller is a company and registered for VAT, normal partial exemption rules will apply to the transaction.
Selling by way of trade and assets and its VAT consequences
When business assets are sold under normal circumstances for furtherance of business, the transaction is subject to standard VAT rate. However, when a business owner sells their whole or a part of their business, the business can be transferred as a going concern (transfer of going concern’ or TOGC), and the transaction will be outside the scope of VAT. This literally means it is not considered as a supply of goods or services and therefore no VAT needs to be charged and accounted for.
For a sale or transfer, of business or assets, to qualify for the “transfer of going concern (TOGC)” treatment, all of the following conditions need to be met:
- The assets should be used by the buyer in carrying on the same kind of business as that carried on by the seller.
- In cases, where the seller is VAT registered, the buyer must already be registered for VAT or immediately become registered for VAT, as a result of the sale.
- In cases, where only a part of the business is sold, it must be capable of separate operations.
- There should be no significant break in the normal trading pattern before or immediately after the sale of the business.
- The business or part of business transferred must be a “going concern” at the time of the sale.
- There must not be a series of consecutive transfers of the trade and assets.
In identifying whether a transaction qualifies as TOGC, consideration must be given to the whole of the circumstances and all the factors must be weighed to ensure TOGC applies otherwise if the business is VAT registered and TOGC conditions are not met, VAT must be charged on each and every asset sale made by the business owner.
VAT attributable to TOGC is considered as a general overhead and a business owner can recover the VAT incurred in full, provided the supplies made by the business are not exempt for VAT purposes.
There are some factors which both the seller and purchaser must consider for avoiding VAT traps. Let’s take a look at some of them.
Uncertainties on TOGC -Where there are concerns whether a sale or transfer is TOGC or not, the seller could be liable to output VAT if not charged and similarly the buyer would not be able to recover input VAT costs where VAT has been charged wrongly.
To avoid falling into such situations, it is advisable to include clauses in the sale or purchase agreement, which states that the buyer agrees to pay VAT on the sale of the business if HMRC finds that it is not a TOGC and the seller agrees to provide a VAT-invoice in such a situation.
Continuation of same VAT Registration number -When the business is being bought as a going concern from a VAT registered seller, and the buyer is not registered for VAT, it is important for the buyer to consider if they wish to continue with the same VAT registration number of that of the seller.
If they decide to continue with the same registration number, the responsibility for the past VAT history of the seller is also transferred to them. Thus, if there were any shortcomings in the VAT filing of the seller, the liability will be transferred to the buyer.
Therefore, even though it will be administratively challenging to apply for a new VAT number, the buyers are strongly advised to apply for a new VAT number, to avoid any previous liabilities.
Land and Buildings -If a sale of business is TOGC and includes a property that would generally be standard rated, the property will not be part of TOGC and will remain standard rated and should be subject to VAT charge. This would typically apply to new commercial buildings or properties on which the seller has opted to tax.
In this situation, the buyer should have an option to tax in place, so the transfer is considered within the TOGC and no VAT is charged on the property.
VAT is an important consideration for both the buyer and seller when transferring a business, and therefore a clear analysis of the circumstances should be undertaken to identify the correct VAT treatment. VAT implications must be given serious consideration in order to prevent a large VAT bill on completion.
You should also consider other tax consequences of buying or selling a business. Our dns tax experts can help with all your tax planning requirements for business sale or acquiring a business.
If you’d like more information or advice on VAT consequences on selling/purchasing a business or other tax planning required, call us on 03330 886686 or you can also e-mail us firstname.lastname@example.org.
Disclaimer :-"This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction".
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