VAT on transfers of a business as a going concern

Marvin Reynolds in our Reading office and Lyndon Firth in our Leeds office co-authored “VAT on transfers of a business as a going concern“, published by Tax Journal on 28 October 2022.

A sale of assets as part of a transfer of a business as a going concern (TOGC) is not treated as a supply of goods or services for VAT purposes, and so is outside the scope of VAT. The treatment is mandatory if the conditions are met. If VAT is charged in error, it would not be recoverable by the transferee as input tax. The business or part of a business that is transferred must be capable of separate operation, and the transferee must carry on the same kind of business as that carried on by the transferor. Special conditions apply to land and buildings in respect of which a sale would have given rise to a standard-rated supply.

The TOGC provisions have two main purposes:

• To relieve the buyer of a business from the burden of funding any VAT on the purchase, helping businesses by improving their cash flow and avoiding the need to separately value assets which may be liable to VAT at different rates, or are exempt, and which have been sold as a whole; and
• To protect government revenue by removing a charge to tax and entitlement to input tax where the output tax may not be paid to HMRC.

The article includes sections on:

• Conditions
• Input tax on expenses related to a TOGC
• Land and buildings
• Groups
• Transfer of VAT number
• Practical issues.

A number of factors should be taken into account when determining whether a transfer qualifies as a TOGC. The effect of the transfer must be to put the transferee in possession of a business that it can carry on as a going concern with minimal interruption.

In recent years, HMRC has become increasingly reluctant to provide written VAT rulings, particularly in respect of whether a transfer qualifies as a TOGC. If there is genuine uncertainty, a potential transferor can make a written request for guidance or clarification, setting out all relevant facts and information, and giving a clear indication of what aspects of the arrangement give rise to doubt or uncertainty. Alternatively, if VAT has been charged where the transferee considers that TOGC treatment is available, one option is to submit a voluntary disclosure to HMRC (rather than claiming the input tax on a VAT return), and HMRC would be obliged to provide a decision on whether the input tax is recoverable.

It is vital that the parties are suitably protected in the event that HMRC considers that TOGC treatment does not apply. For example, the transferor should ensure that the purchase price is VAT-exclusive to allow it to charge VAT in addition to the purchase price. Furthermore, it may be appropriate for the transferor to seek a provision in the contractual documentation for the transferee to indemnify the transferor against any penalty or interest charged by HMRC that may be due if the transfer is not a TOGC because of something that the transferee has done or failed to do. The contractual wording is key and should include suitable warranties with a view to ensuring that the conditions for TOGC treatment are met.