On 5 December 2018, the UK tax authority, HM Revenue and Customs, issued a notice updating its guidance on the value-added tax rules when a business is transferred as a going concern. This blog summarises these potentially complex rules.
VAT Notice 700/9 is designed to ensure that the correct amount of VAT, when chargeable, is properly accounted for and paid by taxpayers.
It also explains when the sale of a business as a going concern (referred to as a TOCG) will not be treated as a supply for VAT purposes, and therefore no VAT will be charged.
The guidance is intended for those selling or otherwise transferring a business, or part of a business. However, it can also be used by those acquiring business.
When The Transfer Of A TOGC Is Not Subject To VAT
Normally the sale of the assets of a VAT-registered business, or a business required to be VAT registered, will be subject to VAT at the appropriate rate. However, in certain circumstances, such a sale of assets is not subject to VAT where the assets are sold as part of a business which is a going concern. These provisions are intended to simplify accounting for VAT when a business changes hands.
No VAT is chargeable when a TOGC is transferred if all of the following apply:
- the assets, such as stock-in-trade, machinery, goodwill, premises, and fixtures and fittings, are sold as part of the TOGC
- the buyer intends to use the assets in carrying on the same (but not necessarily identical) kind of business as the seller
- where the seller is a taxable person, the buyer is also a taxable person or has become one as the result of the transfer
- in respect of land or buildings, which would be standard-rated if it were supplied, the buyer has notified HMRC that they have opted to tax the land by the relevant date, and has notified the seller that their option has not been disapplied by the same date
- where only part of the business is sold it is capable of operating separately
- there is not a series of immediately consecutive transfers of the business
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Deduction Of VAT On Expenses Incurred On The Transfer
Although there is no supply for VAT purposes where there is a TOGC, this does not prevent the deduction, subject to the usual rules, of input tax on related expenses (for example, solicitors' fees and estate agents’ costs).
However, there is a distinction between the extent to which the seller and the buyer can deduct such input tax.
In the case of the buyer, the extent to which VAT can be recovered depends on whether the assets are to be used to make taxable, non-taxable, or mixed supplies.
The sale of the business as a TOGC is not a supply and the input tax incurred on the cost of selling the business cannot be attributed to it by the seller.
Property & The TOGC Rules
Special rules apply to the transfer of land and buildings as part of a TOGC. The notice provides several examples to clarify points of potential confusion, many of which involve property, premises or property rental business, which are subject to more complex requirements.
HMRC stresses that these rules are compulsory, and that taxpayers cannot "opt out" of them. It is therefore essential that they are followed correctly. The incorrect application of the TOGC rules will lead to the blocking of the input VAT incorrectly charged on the transaction by the transferee and the output VAT of the transferor. Those that fail to do so risk attracting penalties and interest. It is therefore recommended that business owners seek tax advice before selling or acquiring a going concern.