VQOTW: Incorrectly Charged VAT on TOGC

My client is buying a business and the vendor wants to charge VAT. Is this correct and if so can my client recover this as input tax?

If your client is actually buying the assets of the business alone, then yes, it may be correct. It is far more likely, however, that they are buying a going concern. If the sale falls within stipulated conditions, then it is outside the scope of VAT and not treated as a supply of goods nor a supply of services so no VAT should be charged. This rule applies equally to the vendor and the buyer of the business.

In broad terms, 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.

 Additionally, 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 from the date the business is taken over. The notification to HMRC should be made on or before the date of transfer, although, there can be different trigger dates if deposits are paid earlier, 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.

If the sale is wrongly treated as a VAT-free TOGC but VAT should have been charged, the vendor is liable to account for the output tax. Conversely, if the sale should have been a VAT- free TOGC but was not treated so and VAT was incorrectly charged, then HMRC will disallow the input tax claimed by the buyer. The grounds being that as the transaction was not liable to VAT, the amount is not input tax and so cannot be reclaimed.

It is worth ensuring that there is a clause in the contracts to protect your client in the event of HMRC disagreeing with the VAT treatment applied.

While a business cannot prevent HMRC issuing an assessment if the VAT position is incorrect, it is worth noting a discretion that HMRC has in respect of an assessment for an over-claimed input tax. We would not recommend relying on it when making a decision whether to agree to the vendor charging VAT, but where this has already happened and HMRC challenge the recovery, it is worth raising. The following extract is from HMRC’s manual https://www.gov.uk/hmrc-internal-manuals/vat-transfer-of-a-going-concern/vtogc4150

“Officers should use their discretion to decide whether an assessment is appropriate. They should consider the circumstances of each individual case. Detailed guidance on this is given in VAT Assessments and Error Correction (VAEC). However, where you are wholly satisfied that the amount of ‘VAT’ on the invoice has been both declared and paid to HMRC by the seller, you may allow the purchaser to recover it as if it were input tax. This is allowed under care and management of the Revenue, to avoid unnecessary bureaucracy where no tax is at risk. Businesses should be told in writing that, although the Department maintains that the ‘tax’ is not actually input tax, in the circumstances no action will be taken to recover it from them. Where returns have not been rendered by the seller or it is not clear that the ‘tax’ has been paid, this treatment is not appropriate.”

Additionally, if an assessment is raised, it is always possible, with varying degrees of success, to argue against the severity of any interest or penalty charges.


Please share this article with your clients


Our team of experts have a wealth of experience and can also provide a written consultancy service at competitive rates.

Back to Community
mm

VAT Advice Consultant
0844 892 2470


Janis worked for HMRC for 20 years covering both Customs & Excise and VAT disciplines

VQOTW: MTD Soft Landing Extension
VQOTW: Medical Equipment
VQOTW: COVID-19 VAT Payment Deferrals