VAT on transfers of a business as a going concern (TOGC) - a guide

Speedread

• 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. 
• 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. 
• It should be noted that the transfer of the share capital of a company cannot in itself constitute a TOGC, as the assets still belong to the company, and there is no supply for the purposes of the TOGC provisions.

TOGC and VAT

The TOGC provisions have two main purposes:

1. 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
2. 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.

If the transferor charges VAT on a TOGC in error, the transferee will not be entitled to reclaim this amount as input tax. The transferor would have to cancel the tax invoice, issue a credit note, and refund the VAT charged.

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 unusual for the VAT number to be reallocated, as the transferee will normally not wish to risk exposure to additional VAT liabilities. In such cases, the transferor will need to deregister, unless they are continuing to trade in another capacity.

The transferor retains the business records, unless the VAT registration number is transferred, but must provide information the transferee needs in order to comply with their duties.

Following a TOGC, the transferee may need to apply for customs authorisations and approvals, as registrations for other duties or taxes will not have been transferred as part of the TOGC.

TOGC conditions and requirements

• The conditions for TOGC to apply are as follows:The transferred assets must be used by the transferee in carrying on the same kind of business (whether or not as part of any existing business) as that carried on by the transferor •    Where the transferor is registered or registerable for VAT, the transferee must already be a taxable person, or must immediately become a taxable person as a result of the transfer
• A transfer of part of a business as a going concern must be capable of separate operation.

There are additional conditions from HMRC which must also be met:

• The assets, such as stock-in-trade, machinery, goodwill, premises, and fixtures and fittings, must be sold as part of the TOGC
• In respect of land or buildings which would be standard-rated if supplied, the transferee must notify HMRC that they have opted to tax the land usually by the date of completion of the transfer, but it could be earlier (this would usually be incorporated into the contract for the transfer)
• There must not be a series of immediately consecutive transfers of the business.

Isolated transactions are not normally a business for VAT purposes. HMRC considers that if a business has not yet made taxable supplies, a transfer might not qualify as a TOGC but, where enough preparatory work has been undertaken prior to making taxable supplies, there will be a business capable of being transferred as a TOGC.

There is no minimum period for which the business must be carried on after a TOGC, and each case must be considered by reference to its own fact pattern. 
 

Input tax on expenses related to a TOGC

Input tax on expenses related to a TOGC (for example, solicitors’ fees and estate agents’ costs) can be recovered.

Transfer of going concern and property, building and land

The transferor is responsible for ensuring correct VAT treatment, including satisfying itself that the transferee’s option to tax (if required) is in place and notified to HMRC by the relevant date unless zero-rated or exempt land or buildings is transferred. 

HMRC have confirmed that a property business can be transferred as a TOGC in certain specific circumstances.

However, the following would not constitute a TOGC:

• The transfer of a building by a property developer who has allowed someone to occupy it temporarily (without any right to occupy after any proposed sale), or who is ‘actively marketing’ it in search of a tenant - there is no property rental business being carried on
• The grant of a lease retaining an interest that has a value of more than 1% of the value of the property immediately before the transfer (disregarding any mortgage or charge). Where more than one property is transferred at one time, this test should be applied on a property-by-property basis, rather than for the entire portfolio
• The sale of a property freehold to the existing tenant who then leases the whole premises to the transferor - this cannot be a TOGC, as the property rental business is not transferred to the tenant.

If any property assets transferred as part of a TOGC are subject to the VAT Capital Goods Scheme (‘CGS’), the responsibility to make any remaining CGS adjustments will pass to the transferee.  

Transfers to Groups

HMRC accepts that a transfer to a company in a VAT group is a TOGC if certain conditions are met. It can also still apply if there is a subsequent transfer to a group member.

What to watch out for

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. 

It is vital that the parties are 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.

If you have any questions or want to discuss Transfers of Going Concern, get in touch today and one of our VAT experts will be happy to help.

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