Normally the sale of the assets of a VAT registered or VAT registrable business will be subject to VAT at the appropriate rate.
A transfer of a business as a going concern (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.
Where the sale meets the conditions, the supply is outside the scope of VAT and therefore VAT is not chargeable.
HMRC see the conditions as being:
- The assets must be sold as part of a ‘business’ as a ‘going concern’*
- The purchaser intends to use the assets to carry 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 the 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
- There are further conditions in relation to transactions involving land (see below)
Assets of a business may be a TOGC in a number of situations. For example:
- the assets may be bought by another person and the seller may cease to trade;
- the existing owner may die or retire, and the business assets be taken over by another person;
- part of an existing business may be sold to another person; and
- the assets may be transferred to a new legal entity, e.g. a sole proprietor may take on a partner.
In all these cases, regardless of whether there is a consideration, the assets are transferred from one person to another and so may be covered by the TOGC provisions and will be done in the course of furtherance of the seller’s business.
TOGC where the seller is not registered for VAT
There can be a TOGC where the seller is not registered for VAT. For example, because the seller is trading below the registration limit. The sale of a non VAT-registered business which includes trading stock, the value of which might otherwise take the trader over the registration limit, will not do so because it can be treated as a TOGC and therefore not a supply.
No significant break in trading
There must be no significant break in the normal trading pattern before or immediately after the transfer. The break in trade needs to be considered in the context of the type of business concerned and might vary between different types of trade or activity. HMRC does not consider that where a ‘seasonal’ business has closed for the ‘off-season’ as normal at the time of sale, that there has necessarily been a break in trade.
In addition, a short period of closure that does not significantly disrupt the existing trading pattern, for example, for redecoration, will not prevent the business from being transferred as a TOGC.
Transactions involving land
If all the conditions above are met, and the buyer has complied with the following requirements, the transfer of land and buildings can be part of a TOGC and therefore not subject to VAT.
- will have opted to tax the land or buildings being transferred and the option is not disapplied in relation to the transfer
- transfers the freehold of a new building (under 3 years old) and the supply, but for the TOGC, would be subject to the standard rate of VAT
But the buyer must also have:
- opted to tax
- notified the seller that their option to tax will not be disapplied