VAT is an essential consideration for both the buyer and seller when a business is transferred. The risk of incorrect VAT treatment can be costly for both buyer and seller.
There are two options when buying a business:
- Purchase of shares in a limited company
- Purchase of the assets of the business
The VAT treatment differs for each option, with various VAT risks. Here are key considerations you should take relating to VAT when buying or selling a business, but we strongly recommend speaking to an expert for advice, too.
VAT and the Sale of Shares
The sale of existing shares in a business is exempt from VAT as it falls under the financial services exemption.
The seller will not charge the buyer VAT, but the buyer should ensure that any agreement to purchase the shares includes confirmation that the seller will issue a tax invoice if, later, HMRC rules that the transaction did not meet the criteria to be treated as an exempt supply.
As the selling of shares is an exempt supply, this affects the seller’s ability to reclaim VAT in connection with the professional costs incurred in selling the business. Where the shares are owned by an individual, recovery of VAT charged on such expenses is not possible.
Where the seller is a company (such as a holding company), the VAT is recoverable subject to normal partial exemption rules. Still, care must be taken to ensure that the costs incurred relate to or are closely linked to an economic business activity. This is demonstrated in the case of Hotel La Tour.
VAT and the Sale of Assets
The sale of business assets would generally be subject to VAT at the standard rate. However, when all or part of a business is sold to a buyer who intends to use the assets to continue in the same trade, the business can be transferred as a going concern (TOGC).
A TOGC is neither a supply of goods nor services and is, therefore, outside the scope of VAT. The seller does not charge VAT on the transfer, and the buyer does not have any VAT to reclaim.
Does the Sale Qualify for TOGC Treatment?
Certain conditions must be met to qualify for TOGC treatment. These include, but are not limited to, requirements in the following areas:
- The way that the buyer uses the assets.
- The VAT registration status of the buyer.
- The operational status and trading history of the buyer.
Additional conditions must be met when land and property are being sold as part of the TOGC, including the buyer’s requirement to tax the land/property if the seller has an option to tax in place.
Treating the sale of a business as a TOGC for VAT purposes is not optional. If the seller charges VAT because the buyer will reclaim the VAT on their VAT return, HMRC can disallow the buyer’s VAT recovery as VAT was incorrectly charged.
How the Shorts team can help
Understanding the VAT implications and ensuring the VAT treatment is correct when buying or selling a business is essential. Getting it wrong can cause difficulties and potential penalties. To assist you with this process, we have a specialist VAT advisory department with particular expertise in the VAT treatment of business transfers, both in the UK and internationally.
Whatever your VAT query involves, get in touch with our team of specialists today.
Are you looking for information on how to sell a business in the UK? Read our in-depth guide.
