VAT – When A Business Is Sold

If a business is registered for VAT it charges VAT on the goods it sells in the course of its trade. This rule applies not only products and services but anything the business sells. However, there’s a rule which overrides the normal VAT treatment that is when a business is sold as going concern.

Where a business is sold as a going concern, the transaction is outside the scope of VAT. That means VAT isn’t chargeable, even on items on which you would normally charge it, e.g. stock. Applying the TOGC rules correctly is very important for the purchaser.

The transfer of a business as a going concern (TOGC) rules concern the VAT liability on the sale of a business. Normally the sale of the assets of a VAT registered or VAT registerable business will be subject to VAT at the appropriate rate.

https://www.gov.uk/hmrc-internal-manuals/vat-transfer-of-a-going-concern

Where the sale of a business includes assets and meets certain conditions the sale will be categorised as a TOGC. A TOGC is defined as ‘neither a supply of goods nor a supply of services’ and is therefore outside the scope of VAT. Under the TOGC rules no VAT would be chargeable on a qualifying sale.

Have a look at our VAT services page.

All the following conditions are necessary for the TOGC rules to apply:

• The assets must be sold as part of a ‘business’ as a ‘going concern’. In essence, the business must be operating as such and not just an ‘inert aggregation of assets’.
• The purchaser intends to use the assets to carry on the same kind of business as the seller.
• Where the seller is a taxable person, the purchaser must be a taxable person already or become one as the result of the transfer.
• Where only part of a business is sold it must be capable of separate operation.
• There must not be a series of immediately consecutive transfers.
• There are further conditions in relation to transactions involving land.

The TOGC rules can be complex and both the vendor and purchaser of a business must ensure that the rules are properly followed. The TOGC rules are also mandatory which means that it is imperative to establish from the outset whether a sale is or is not a TOGC. For example, if VAT is charged in error, the buyer has no legal right to recover it from HMRC and would have to seek to recover this ‘VAT’ from the seller.

If you need further information; feel free to contact us.