VAT considerations when buying a business

VAT must be considered when buying a business, as with any corporate deal. If not addressed quickly, issues to do with VAT can at best prove an unneeded additional complication and can result in delays to closing the deal. At worst, it can end up costing you a lot of money. However dealing with these issues promptly mean structuring the deal in a more profitable way.


VAT is, of course, a very intricate subject and there are specialists who definitely should be consulted if there are any detailed questions involved. It is usually assumed that any concerns surrounding VAT will be dealt with by the accountants or lawyers assisting with the deal, but a concise knowledge of the biggest questions involved is certainly useful.


Firstly, the simplicity of the VAT questions involved in the deal can be dependent on the type of business you intend on buying. Sectors such as the hotel trade, education, financial services, charities, financial services and the property industry each have specific VAT rules. For deals involving these sectors, you are strongly advised to seek the advice of a VAT specialist.


For other businesses, the VAT consideration largely comes down to two options: a transfer of a business as a going concern (TOGC), or an asset sale. A TOGC is outside the scope of VAT.

To qualify as an TOGC, the sale must meet all of the conditions below:

The transfer must put the new owner in possession of a business that can be operated as such.

The business, or part business, must be a going concern at the time of the transfer

The assets being transferred must be intended for use by the new owner in carrying on the same kind of business

There must not be a series of immediately consecutive transfers of the business

Where the seller is registered for VAT, the buyer must be registered (or required to be registered at the date of transfer) for VAT, because all of the conditions for compulsory registration are met, or be accepted for voluntary registration. There can be a TOCG where the seller is not registered for VAT in certain circumstances.

There must be no significant break in the normal trading pattern before or immediately after the transfer

If only part of the business is being transferred, it must be able to operate alone.


Full conditions for qualifying as a TOGC are set out in HM Revenue and Custom's Notice 700/9/02, paragraph 2.3. For buyers unable to recover VAT charged on the sale, the possibility of structuring the deal as a TOGC is worth looking into.


If the sale of the business does not meet any of the conditions to qualify as a TOGC, then it is an asset sale. VAT can be charged on these sales, depending on the nature of each of the assets involved.


In addition to classifying the sale, any land or property included will also need an investigation with regards to any VAT issues. By default these are exempt from VAT, but there are exceptions. If the owner of the land or property has chosen to tax his interest in the property, it could complicate a TOGC. In order to ensure that the whole sale is outside the scope of VAT, the purchaser will need to opt to tax the property himself, on or before the change of ownership.


Where property purchased as part of a TOGC qualifies as a Capital Goods Scheme item, it is very important for the seller to pass on its CGS history to the new owner. CGS corresponds to another piece of VAT legislation, that applies to certain high value expenditure. Properties purchased in the last ten years, costing more than £250,000 (excluding VAT), where VAT was paid on the purchase price, should be looked into, as the amount of input tax claimed back by the previous owner will have a bearing on your tax bill in the future.


Using a simple example; a business buys a property for £500,000 plus VAT of £87,500 and uses the building to make parts for the motor industry. It is fully taxable, so it correctly claims all the VAT back on its VAT return. After five years, it sells the building, not having given consideration to the VAT position. It has not opted to tax the building, thereby making the sale an exempt supply, and has not made a CGS adjustment to the input tax previously claimed. A couple of years later, HM Revenue and Customs come along for a routine VAT inspection, and spot the error. As the sale of the building was exempt, and it happened halfway through the CGS adjustment period of ten years, HM Revenue and Customs will issue an assessment to recover half of the VAT already claimed. The business gets a bill for £43,750 plus interest, and will possibly incur penalties as well.


This situation can be easily avoided. However, if the seller does not take appropriate action before the sale, unfortunately, there will be nothing you can do to rectify the situation once the sale has gone through.


Provided you are both aware of the situation, or the seller takes professional advice before making the sale, you can solve this problem easily. The main thing is to be aware of it in the first place. Any business that owns a commercial property can opt to tax (i.e. charge VAT) on supplies they make on the premises. In the case of normal commercial properties used for a business's own taxable activities, it is not normally necessary to opt to tax it. It is only necessary if the owner wishes to sell the freehold of, or rent out a building that qualifies as a capital item (and most will be these days).


If he opts to tax at this stage, he will change an exempt supply into a taxable supply. In the example above, the remaining period of the CGS adjustment period becomes fully taxable, and there is no clawback of previously claimed input tax under the CGS. In other words, you will not have to pay any money back to HM Revenue and Customs.


A straightforward purchase of business assets which include a property acquired for more than £250,000 may also fall under CGS rules, which can be found in Customs Notice 706/2/02. Specialist advice is recommended when dealing with these cases.

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