The sale of the assets of a VAT registered or VAT registerable business will usually be subjected to VAT at the applicable rate. However, the transfer of a going concern (TOGC) is treated differently and VAT may not be chargeable, subject to the fulfilment of certain conditions.
The conditions HM Revenue & Customs (HMRC) has identified are:
- The assets must be sold as part of a ‘business’ as a ‘going concern’
- The assets are to be used by the purchaser with the intention of carrying on the same kind of business as the seller
- Where the seller is a taxable person, the purchaser must be a taxable person already or become one as a result of the transfer
- 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
- In respect of land which would otherwise be standard rated if it were supplied, the purchaser must notify HMRC of an option to tax the land by the relevant date and notify the seller that the option to tax will not be disapplied under anti-avoidance rules.
On 13 December 2013, the First Tier Tribunal (FTT) released its decision in the case of the VAT appeal lodged by Intelligent Managed Services Ltd (2013) UKFTT 741 (TC) (TC03119). The decision can be viewed here http://abytx.co/1dsbAvg
This was an unusual case in as much as it is believed to be the first time the key TOGC issue had been brought before a tribunal and concerns whether the transfer of a business can be treated as VAT-free under the TOGC provisions, when the transferee is part of a VAT group registration that only makes supplies to another member of the same VAT group.
HMRC’s assertion was that as intra-group transactions are disregarded for VAT purposes, there was no continuity of taxable supplies by the recipient entity and so the conditions could not be met for the sale to be a TOGC. This view is supported by the department’s internal guidance manual note at VTOGC5300, which can be viewed here http://abytx.co/1eDMQy4
Despite the Appellant’s arguments, the Tribunal agreed with HMRC’s stance and upheld the decision to assess the VAT chargeable on the transaction.
This decision highlights the need for caution with the VAT treatment when contemplating business disposals or acquisitions, particularly if VAT group registrations are involved. Although an obvious solution might be to initially transfer the assets and trading into a separate entity outside the group registration and subsequently introduce it to the group, care also needs to be taken with this approach where the group is partly exempt. It is recommended that professional advice is sought to avoid any nasty surprises at a later date.
Author: Mark Burke, VAT Manager on the ReSource Tax and VAT Consultancy Team.