Transfers of Your Business and VAT – can you rely on HMRC guidance?

One of the last things you want when you transfer your business to another person, partnership or company, is to end up paying VAT on some of the major assets of your business such as stock or commercial property.  It can create a tax risk in fact for both parties involved.

In principle, and providing certain conditions are met there is normally no VAT charged on the transfer of a “business as a going concern” (TOGC). For example, if a VAT registered business providing carpentry services sells all of its tangible assets (vans, tools, and materials) and order book to another VAT registered business that intends to use the assets to provide carpentry services it should be possible to meet the conditions for TOGC treatment. If instead all the items were sold separately to different buyers VAT would be due on each item.

Each business is different and this can lead to uncertainty about whether a particular transfer will qualify for TOGC. Various factors will influence whether or not HM Revenue & Customs (HMRC) will regard a transaction as consisting of a TOGC. For example, if the agreed sale price of the business includes an amount for goodwill, or if most or all of the employees of the business being sold become employees of the acquiring business, these factors are indicative that the transaction consists of a TOGC. The absence of employees or goodwill does not in itself prevent TOGC treatment applying as long as the assets sold are sufficient to put the purchaser in a position to carry on the same type of business as the seller.

Getting the VAT treatment right is the responsibility of the seller, but it has implications for the buyer. HMRC has been known to refuse claims for VAT recovery in situations when it considers that the VAT should not have been charged.

Currently there is no process for obtaining advance clearance from HMRC that a particular transaction being contemplated consists of a TOGC. HMRC does, however, provide a considerable amount of guidance relating to the issue on the HMRC section of the GOV.UK website.

But, it is important to be aware that not all of the HMRC guidance on transfers of going concern is up to date. For example key VAT Notice 700/9  that  taxpayers tend to refer to has a publication date of December 2012 and includes a section at paragraph 4.3 on VAT groups and TOGC.   

That part of the guidance is out of date as it was successfully challenged in court at the Upper Tribunal as far back as 2015 .  HMRC published a Brief in 2016 and updated its manuals to reflect the Upper Tribunal decision, but has not yet updated VAT Notice 700/9, although it is expected to be updated  “soon”.

As our VAT team keep up to date on tax from a variety of sources, it is important to seek advice on crucial transactions and we are here to help you – please contact us hello@garbutt-elliott.co.uk