Buying & Selling a BusinessVAT Considerations

When buying or selling a business, VAT can complicate matters. It's not always easy to understand, but crucial to get right.

Buying & SellingOptions

VAT is an important consideration for both the buyer and seller when a business is being transferred. The risk of getting the VAT treatment incorrect 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 is different for each option and each option has different VAT risks. Here we will share the key considerations relating to VAT when buying or selling a business, but we strongly recommend speaking to an expert for advice too.

VAT and Purchase of Shares

The sale of existing shares in a business is exempt from VAT as it falls under the financial services exemption.

The buyer will not be charged VAT but should ensure that any agreement to purchase the shares includes confirmation that the buyer will be issued with a tax invoice if, at a later date, HMRC rule 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 costs is not possible.

Where the seller is a company (such as a holding company), the VAT is recoverable subject to normal partial exemption rules, but care has to be taken to ensure that the costs incurred relate to, or are closely linked to, an economic business activity.

The sale of shares in a company requires careful planning to ensure that neither the buyer nor seller are disadvantaged from a VAT perspective.

VAT and Purchase of Assets

The sale of business assets would normally be subject to VAT at the standard rate. However when the whole, or part, of a business is sold to a buyer whose intention is 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 a supply of 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.

Do you qualify for TOGC treatment?

To qualify for TOGC treatment, certain conditions must be met. These include, but are not limited to, requirements in the following areas:

  • The way that the assets are used by the buyer.
  • VAT registration status of the buyer.
  • The operational status and trading history of the buyer.

There are additional conditions to be met when land and property is being sold as part of the TOGC, including the requirement for the buyer to opt tax the land/property if the seller has an option in place.

Treating the sale of a business as a TOGC, for VAT purposes, is not optional. If the seller charges VAT on the basis that 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

Whether you’re buying or selling a business it is important to understand the VAT implications and ensure the VAT treatment is correct. To assist with this, we have a specialist VAT advisory department with particular expertise in the VAT treatment of business transfers.

Whatever your VAT query involves, get in touch with our team of specialists today

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Get in touch with the Shorts VAT Team

Shorts has more expert tax advisers than any independent firm in our region. Whatever your VAT query, our team is here to help.

The Shorts VAT Team