Andrew Needham looks at the small print of the ‘Transfer of a going concern’ VAT rules so that you can avoid falling into a trap.
When you buy the trade and assets of a business, it can be treated as the ‘transfer of a going concern’ (TOGC) and no VAT need be charged. This treatment applies when:
- an entire business is transferred as a going concern; or
- a part of the business is capable of separate operation; and
- the purchaser uses the assets in the same kind of business; and
- the purchaser is registered for VAT, if not already registered, or is registerable as a result of the transfer.
The transaction is treated as outside the scope of VAT, so no VAT should be charged on any of the assets being sold, giving a cashflow advantage to the business.
Need to be registered
Strictly speaking, the final bullet point above requires the purchaser to ‘immediately become as a result of the transfer, a taxable person’, which means it becomes liable to register for VAT. However, it is safest to regard the rule as meaning that the vendor should obtain proof that the purchaser has applied to register immediately. This should minimise the risk of any possible enquiries by HMRC.
This should also deal with the pitfalls of a very small business with sales below the registration limit, the purchaser of which would not therefore automatically become a taxable person, and so would have to register voluntarily in order to do so.
However, HMRC sometimes takes the view that where compulsory VAT registration does not apply, TOGC treatment will require the purchaser to actually be registered at the time of the transfer. In Notice 700/9, HMRC has put this in terms of the purchaser having been accepted for voluntary registration at the date of the transfer. So, it is not sufficient for the purchaser merely to have applied for voluntary registration, even if when registration is granted, it is backdated to before the date of the transfer. This can be a problem, as HMRC are not always quick to process applications.
HMRC’s online registration service is much quicker at processing VAT registrations than the paper system, so if deadlines are tight, businesses should apply online. For some reason best known to HMRC, online applications fall into an electronic black hole for 72 hours before they are retrieved, but can then be processed in about five working days providing HMRC have no queries.
It is worth telephoning the Registration Unit to check on the progress of the application so that you can confirm when the application has been accepted, as it takes a couple of days for the VAT number to be allocated and posted out to the business. Once the application has been accepted, TOGC treatment will apply, and the supply will be outside the scope of VAT.
Cashflow advantage
If TOGC treatment does not apply and VAT is charged, the business can still claim it back. However, the business will have to pay out the VAT in the first place at a time when cash flow will be tight having just bought a new business, and it could be three to four months before it can actually claim it back from HMRC.
Although simple in concept, these rules have tripped up many businesses and their advisers.
Practical Tip:
If you are buying a business or part of a business and its turnover is below the VAT registration threshold, make sure you register for VAT before you complete the purchase to avoid a VAT charge
