Normally the sale of the assets of a VAT registered business will be subject to VAT at the appropriate rate. A TOGC, however is the sale of a business including assets which must be treated as a matter of law, as “neither a supply of goods nor a supply of services” by virtue of meeting certain conditions. It is always the seller who is responsible for applying the correct VAT treatment and will be required to support their decision.
Where the sale meets the conditions, the supply is outside the scope of VAT and therefore VAT is not chargeable.
The word ‘business’ has the meaning set out in The VAT Act 1994, section 94 and ‘going concern’ has the meaning that at the point in time to which the description applies, the business is live or operating and has all parts and features necessary to keep it in operation, as distinct from its being only an inert aggregation of assets.
TOGC Conditions
The conditions for VAT free treatment of a TOGC:
- The assets must be sold as a business, or part of a business, as a going concern
- The 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 in relation to that part (HMRC guidance uses the words “intend to use…” which, in some cases may provide additional comfort)
- There must be no break in trading
- Where the seller is a taxable person (VAT registered) the purchaser must be a taxable person already or immediately become, as a result of the transfer, a taxable person
- 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
- Where the transfer includes property which is standard-rated, either because the seller has opted to tax it or because it is a ‘new’ or uncompleted commercial building the purchaser must opt to tax the property and notify this to HMRC no later than the date of the supply. This may be the date of completion or, if earlier, the date of receipt of payment or part payment (eg; a deposit). There are additional anti-avoidance requirements regarding the buyer’s option to tax
Please note that the above list has been compiled for this article from; the legislation, HMRC guidance and case law. Specific advice must be sought.
Property transfer
The sale of a property may qualify for TOGC if the above tests are met. Usually, but not exclusively, a TOGC sale is the sale of a tenanted building when the sale is with the benefit of the existing lease(s) – (the sale of a property rental business rather than of the property itself). Another example of a property TOGC is where a property under construction is sold (a development business). As may be seen, timing with a property TOGC is of utmost importance. For example, an option to tax one day late will invalidate TOGC treatment. A guide to land and property.
What purpose do the TOGC rules serve?
The TOGC provisions are intended to simplify accounting for VAT when a business changes hands. The main purposes are to:
- relieve the buyer from the burden of funding VAT on the purchase, helping businesses by improving their cash flow and avoiding the need to separately value assets which may be liable at different rates or are exempt and which have been sold as a whole
- protect government revenue by removing a charge to tax and entitlement to input tax where the output tax may not be paid to HMRC, for example, where a business charges tax, which is claimed by the new business but not paid by the selling business
What if it goes wrong?
TOGC treatment is not optional. A sale is either a TOGC or it isn’t. It is a rare situation in that the VAT treatment depends on; what the purchaser’s intentions are, what the seller is told, and what the purchaser actually does. All this being outside the seller’s control.
Add VAT when TOGC treatment applies:
Often, the TOGC point can be missed, especially in complex property transactions.
The addition of VAT is sometimes considered a “safe” VAT position. However, output tax will have been charged incorrectly, which means that when the buyer claims VAT shown on the relevant invoice, this will be disallowed. This can lead to;
- potential penalties and interest from HMRC
- the buyer having to recover the VAT payment (often the seller, having sold a business can be difficult to track down and then obtain payment from)
- significant cash flow issues (HMRC will need to be repaid the input tax claim immediately)
- if a property sale, SDLT is likely to be overpaid
Sale treated as a TOGC when it is a taxable supply:
When VAT free TOGC treatment is applied to a taxable supply (possibly as one, or more of the TOGC conditions are not met) then there is a tax underdeclaration. The seller will be assessed by HMRC and penalties and interest are likely to be levied. There is then the seller’s requirement to attempt to obtain the VAT payment from the buyer. Similarly to above, this is not always straightforward or possible and it may be that the contract prohibits additional payment. There is likely to be unexpected funding issues for the buyer if (s)he does decide to make the payment.
Considering the usually high value of sales of businesses, the VAT cost of getting it wrong can be significant.
Summary
This is a complex area of the tax and an easy issue to miss when there are a considerable number of other factors to consider when a business is sold. Extensive case law (example here and changes to HMRC policy here) insists that there is often a dichotomy between a commercial interpretation of a going concern and HMRC’s view. I sometimes find that the buyer’s intentions change such that the TOGC initially applied becomes invalid when the change in the use of assets (from what was notified to the seller) actually takes place. HMRC is not always sympathetic in these situations. One of the questions I am often asked is: “How long does the buyer have to operate the business after purchase so that TOGC treatment applies?” Unsurprisingly, there is no set answer to this and HMRC do not set a specific period. My view, and it is just my view, is that an absolute minimum time is one VAT quarter.
Contracts are important in most TOGC cases, so it really pays to review them from a VAT perspective.
I very strongly advise that specialist advice is obtained in cases where a business, or property is sold. And yes, I know I would say that!