Delayed VAT re'gn

Delayed VAT re'gn

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New client is taking over two existing bar/restaurant businesses through two ltd cos. Current owner's solicitors assuming that the transfer will be under TOGC. However, if my client delays registering for VAT he will have perhaps three months trading "VAT free" before he hits the registration limit (and perhaps up to another month before he has to register). In this line of business the prices of his sales are going to remain the same whether he is registered or not so the VAT portion will effectively go straight to his bottom line. Obviously he will have to pay VAT on the purchase (which he will claim back in due course) but I believe this will be well compensated for by the VAT saving on the sales.

Any thoughts?

Ta
Nathan Hamill

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By User deleted
25th Aug 2007 10:49

PLEASE read VAT booklet 700/1
You MUST register from day 1.

1.9 What if I take over a business from someone else?

If you take over a VAT registered business from someone else, as a going concern, you are liable to be registered, unless you qualify for exemption from registration, (see paragraph 2.7). You may be able to transfer the previous VAT registration number to yourself (see Notice 700/9 Transfer of a business as a going concern). Your registration date would be the date you take over the business. Section 3 tells you how to register for VAT in these circumstances.

If the previous owner was not registered for VAT, you must look carefully to see if you need to register. Section 2 of this notice will help you decide this.

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By User deleted
27th Aug 2007 20:54

see s49 of VATA 1994
49 Transfers of going concerns

(1) Where a business carried on by a taxable person is transferred to another person as a going concern, then—

(a) for the purpose of determining whether the transferee is liable to be registered under this Act he shall be treated as having carried on the business before as well as after the transfer and supplies by the transferor shall be treated accordingly; and

(b) any records relating to the business which, under paragraph 6 of Schedule 11, are required to be preserved for any period after the transfer shall be preserved by the transferee instead of by the transferor, unless the Commissioners, at the request of the transferor, otherwise direct.

(2) Without prejudice to subsection (1) above, the Commissioners may by regulations make provision for securing continuity in the application of this Act in cases where a business carried on by a taxable person is transferred to another person as a going concern and the transferee is registered under this Act in substitution for the transferor.

(3) Regulations under subsection (2) above may, in particular, provide—

(a) for liabilities and duties under this Act (excluding sections 59 to 70) of the transferor to become, to such extent as may be provided by the regulations, liabilities and duties of the transferee; and

(b) for any right of either of them to repayment or credit in respect of VAT to be satisfied by making a repayment or allowing a credit to the other;

but no such provision as is mentioned in paragraph (a) or (b) of this subsection shall have effect in relation to any transferor and transferee unless an application in that behalf has been made by them under the regulations.

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By mbuffery
28th Aug 2007 08:49

Be very careful
Briefly, if the existing businesses are registered for VAT, and trading above the VAT registration threshold, then by purchasing as a TOGC, you have a legal obligation to register from day 1, because their turnover counts for the calculation. If the businesses are registered, but below the threshold, then you need not register from day 1. However, in that case, the vendor will be obliged to charge you VAT on the sale, which will not be recoverable unless you are registered for VAT. Even then, much of the VAT will not be recoverable, because it will relate to stock sold while the business is not registered for VAT. If in doubt, take specialist advice, because most lawyers are not familiar with the intricacies of VAT.

Good luck

Mark Buffery

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By User deleted
28th Aug 2007 09:14

From Day 1
Mark's advice is spot-on.

If it is a ToGC then there will be no VAT on the purchase price - that's the point of a ToGC. If VAT is charged but the sale meets the requirements of a ToGC, HMRC will dis-allow the recovery of that input VAT as it not shouldn't have been charged - so check to ensure if VAT is being charged or not on the sale and that the sale meets or does not meet ToGC rules.

If business is VAT registered (which it must be if the seller is thinking about charging VAT on the sale! - as per OP), then the buyer must register from Day 1 for it to be a ToGC. Otherwise, HMRC will argue it is not 'the transfer of a going concern' if one business is VAT registered and the other one isn't - how can it be the same business if one os over the VAT limit and the other one isn't in the last 12 months?.

If there are properties involved which have had an option to tax applied to them, then those options must also be exercised by the buyer, from Day 1 as well. Again if this doesn't happen HMRC will argue it is not a true ToGC and require VAT to be paid where it was previosuly not charged on the sale.

So in summary.

If seller is VAT registered - for a ToGC buyer must be VAT registered from date of 'sale/transfer'. If buyer not registered for VAT then not a ToGC and VAT will be due on the sale.

If seller is not VAT registered - for a ToGC buyer can be, but doesn't have to be VAT registered.

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By deltic1
27th Aug 2007 14:44

depends but yes in most cases i would say

if you are buying a going concern and it was already VAT registered and there is no reason not to deregister the business

eg drop in turnover to below limit or plans to very quickly for some reason or another

then register from day 1

even if new owner was going to close down to revamp premises etc then still register in order to claim input vat where allowable on refurbishment costs etc

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By martinfoley07
27th Aug 2007 11:44

Not so sure.
It is certainly widely believed you are required to register. But....?

VAT helpline is hardly the font of wisdom in all queries ; however I queried them on this a couple of months ago and they were adamant that you are NOT required to register immediately.
I think the problem (ie widespread belief you ARE required to register) may arise from the use of the word "liable" in their notice with the assumption the buyer is under compulsion to use TOGC for VAT purposes.

I then went to large firm for an opinion since I was concerned about conflicting views/confusion on this aspect, and they were also adamant there was no compulsion to register from day 1.

Hey ho. VAT is such a simple tax.

(p.s. there are of course various factors to take into consideration assuming it IS a choice of TOCG or not!! The buyer will of course be suffering input VAT from the seller on VATable assets acquired if you do not TOGC/register).

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By martinfoley07
28th Aug 2007 12:12

so I think there is agreement?
Going to Nathan's original question,
(i) it is not compulsory to go TOGC route
(ii) if decide to not go TOGC route, no compulsion to register from day 1
(iii) but will then suffer input VAT on assets acquired **

So sums need to be done. I think the reason it is widely assumed TOGC route is "required" (hence VAT reg from day 1 is "required") is because in most cases that is going to be the optimum route. In the case I was concerned with, the sums made it more attractive not to go down TOGC/registration route - hence my digging in face of being initially being told by various folk it was required.

But in doing the sums, Nathan, under no circumstances merrily assume that ALL the VAT suffered on the purchase "will be claimed back in due course".

(n.b. well, ** assuming seller is VAT registered which must be the case, given Nathan's comment about potentially 3 months trading before hits VAT reg threshold)

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By Sarah Kay
28th Aug 2007 21:25

beware the detail
I am a VAT specialist who has worked for a major firm. I have reviewed many 'TOGC' agreements prepared by solicitors and have often advised that a contract is a TOGC when the solictor said it wasn't and vice versa. You have to be very careful about exactly what the contract says and the devil does tend to be in the detail.

If a deal is a TOGC for VAT purposes it won't cease to be a TOGC simply because the parties involved say it isn't a TOGC. In this sense you do not have a choice over the VAT treatment to apply to the sale or your client's VAT registration liability.

However, you can exercise some choice in advance by choosing whether or not to fulfill the conditions for TOGC treatment. To pick an easy example, one condition for a TOGC to exist is that there must be no significicant break in trade. Closing the business for a period would break this condition and the sale could not be a TOGC.

Be careful, by going against the seller's view of the transaction you are shifting the risk of incorrect VAT treatment to your client. If your client does not register and HMRC decide that TOGC treatment should apply they will want back VAT on takings and not allow recovery of the VAT charged on the transfer which will entail your client trying to recover it from the seller instead. The potential for things to get messy is huge.......

There are many Tribunal cases involving restaurants which may be helpful to your client in assessing HMRC's view (Tolleys VAT cases has loads of references).

Good luck.

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By nathanhamill
28th Aug 2007 21:55

What VAT is not reclaimable
Martin

Can you advise what VAT you do not think is claimable?

Ta

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By User deleted
28th Aug 2007 21:57

Thank you Sarah
I will now stop banging my head against this brick wall.

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By User deleted
28th Aug 2007 14:10

I think this is dangerous territory
He would have to take steps to ensure he is not taking over a going concern, which if he is taking over existing bars and restaurants, will not be simple. You can't simply decide not to apply the TOGC rules. If it is a going concern, the rules are automatic and he must register for VAT. He doesn't come outside of the TOGC rules just by not registering for VAT. I have assumed all along, from the way the question was worded, that the current owners were required to be registered due to the level of their turnover and it has always been my understanding in these situations that the previous owners turnover needs to be included in the calculations to see when registration is due.

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By martinfoley07
28th Aug 2007 17:30

The nub of the matter seems to be ....
"You can't simply decide not to apply the TOGC rules. If it is a going concern, the rules are automatic and he must register for VAT."

I can only say that , in answer to this very specific question
(ie - are you able to decide, or is it automatic)
that
(i) VAT helpline
and
(ii) a major firm
were both adamant you could decide, and that it was not automatic.

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By theaardvark
30th Aug 2007 10:18

2 Separate ToGC Tests.....
It is worth noting that there are 2 separate ToGC rules. 1 to decide whether VAT is chargeable on the sale price and 1 to decide whether the purchaser ("transferee") must include the vendors last 12 months turnover when determining whether he/she is required to register.

Recent Tribunal cases have suggested that the scope of the latter (for determining registerability) is much, much wider than the former (for VAT liability). Indeed, in a number of recent cases involving Pubs, the Transferee didn't even purchase anything from the Transferor. They simply agreed a new lease with the Brewery / Landlord. Regardless, the Tribunal ruled that goodwill inherent in the building / location / name was transfered to the Tansferee and that the Transferee was required to include the Transferors turnover in the previous 12 months when determining registerability.

It is therefore possible to fail the ToGC requirement on the liability test and have VAT chargeable on the sale but still meet the ToGC requirements on the registerability test and have to include the Transferors turnover in you registration test. An example of this would be 2 immediately consecutive transfers.

Regards

Paul Taylor
Senior VAT Consultant
Dains

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