A business could change hands from one owner to another, e.g. a sale of the whole business in its entirety, including premises, fixed assets, goodwill, trading stock, the business name and staff etc. When this happens the Transfer of Going Concern (TOGC) VAT rules must be examined to determine whether it is a sale of assets, or a sale of a business – a “transfer of a going concern”. If it is a TOGC, there are special rules to avoid having to add VAT on to the price of the business.
The rules are in place to avoid having to separately value each component of the business, more importantly, to aid cash flow for the buyer (who doesn’t need to find 20% VAT only to recover it in their next quarter’s VAT return), and also to prevent VAT leakage from one party declaring the input VAT and the other omitting to declare the output VAT (or not in a position to pay it).
Therefore the TOGC rules are mandatory. They must be followed if the person selling is VAT registered (or should be VAT registered but isn’t). The parties to the sale cannot choose not to treat it as a going concern.
A re-cap of the TOGC rules:
What is not a transfer of going concern?
- A sale of assets that were used in the business
- A sale of the property that the business was conducted from
What is a transfer of going concern?
- A sale of the whole a business by a VAT registered entity,
- A sale of a separate identifiable part of a business by a VAT registered entity,
…where there is not any break in trade before or after the transfer.
You can see that if a business has been closed for lockdown then it is not clear whether the business is selling its assets, or transferring the whole of itself. Under normal principles, due to the break in trade, it would be reasonable to think that this falls outside the transfer of going concern rules and the seller/buyer may come to the conclusion that VAT should be applied to the sales price. It is very likely that this is the wrong conclusion to draw.
Care must be taken in assessing whether any asset/business sale is a TOGC.
If the parties apply the rules incorrectly, HMRC would deny the input tax deduction for the buyer, leaving them significantly out of pocket. Their only recourse would be to try to recover it from the seller who incorrectly charged it. There should be clauses in the sale contract to this effect, if one was drawn up, which may not be the case.
HMRC officers generally follow guidance that allows them to overlook the matter if the seller has accounted for and actually paid the output VAT over to HMRC. In cases where the seller does not pay the output tax over to HMRC the purchaser is exposed for the error.
If you are thinking of selling a business or buying a business that was closed throughout the pandemic and need some advice on TOGC please contact Ellis & Co at 01244 343504.