If a sale of a business qualifies as a transfer of a going concern (TOGC) then no VAT is charged on the sale. TOGCs are outside the scope of VAT. Note this is compulsory if the sale qualifies as a TOGC.
As well as saving on VAT, the buyer would also save on any Stamp Duty Land Tax as this is calculated on the VAT inclusive amounts of the property.
If a sale of a business qualifies as TOGC but VAT was charged on the sale, the buyer will not be able to claim this back as input VAT. The seller needs to cancel the invoice and refund the VAT paid by the buyer.
A sale of a business will qualify as a Transfer of a Going Concern if
- A business is being sold rather than just individual assets
- If part of a business is being sold, it must be capable of being run separately as a business.
- The buyer must carry on the same type of business as the seller
- There is no significant break in trading when the new owner takes over the business
- There must not be consecutive transfers of the same business
- If the seller is VAT registered, then the buyer must be registered or in the process of being registered for VAT (it is not recommended that the buyer takes on the seller’s VAT number in case of historic errors)
Transfers of Going Concern and Option to Tax
20% VAT is charged on sales of new commercial buildings (i.e. that are less than 3 years old). Commercial buildings that are older than 3 years are exempt from VAT.
An option to tax is taken out on buildings that are exempt from VAT to turn it into standard rated. It means that when the building is rented out or sold, 20% VAT needs to be charged. This also allows input VAT suffered on expenses related to the building to be recovered.
If a business sale includes a new commercial building, then for the whole sale to qualify as a TOGC, the buyer needs to make an option to tax election on the building.
If the buyer does not wish to take out an option to tax, then the property element of the sale will be subject to 20% VAT. The remaining part of the sale will be still be outside the scope of VAT as a TOGC.