VAT charged on the sale of a business

There are many things to consider when selling a business, but what about the payment of VAT? VAT is charged on most transactions, but it is not as straightforward when it comes to the purchase of a business.

If a business is buying the assets of another business alone then VAT will be charged against these assets. However, in most cases, businesses are bought as a going concern.

In this instance, as long as the sale falls within stipulated conditions, then it is outside the scope of VAT and not treated as a supply of goods or a supply of services so no VAT should be charged.

In order for the sale of a business to be treated as a VAT-free transfer of a going concern (TOGC), the following must apply:

  • the sum of assets purchased must be capable of forming a separate business in their own right;
  • the assets must be used by the buyer in continuing the same kind of business;
  • where only part of the business is sold it must be capable of operating separately;
  • where the vendor is VAT registered, the buyer must also be registered or liable to be registered as a result of the transfer, and
  • there must not be a series of immediately consecutive transfers of the business.

Where the business includes a new commercial property or a property that the vendor has opted to tax, then the buyer must also opt to tax the property.

HM Revenue & Customs (HMRC) should be notified of this on or before the date of transfer or if the vendor issues any invoices prior to completion. The purchaser must also notify the seller that their option will not be dis-applied under anti-avoidance rules by the same date.

Where a sale is incorrectly classed as a VAT-free TOGC, the vendor will be liable to account for the output tax. If a sale should have been a VAT-free TOGC and VAT was incorrectly charged, then HMRC will disallow the input tax claimed by the buyer.

To ensure this doesn’t happen, it is worth including a clause in the sales contract to protect the sale in the event of HMRC disagreeing with the VAT treatment applied.

LINK: VAT Transfer of a going concern

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