Goodwill or TOGC can you solve it?

Goodwill or TOGC can you solve it?

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My client and his boss have amicably agreed to go their separate ways after some years of working together. Their business is to design bespoke software for a fee and then to undertake periodic updates and maintenance under a maintenance contract. My client will operate as a limited company and this company will pay the to be 'ex boss' £200,000 to take over a tranche of the client base and the existing maintenance contracts thereon. I believe that this is a purchase of goodwill, my client should be charged, and can reclaim the VAT, and incidentally CT relief should be available on the goodwill amortisation. My client's accountant has advised that the transaction is a TOGC - no VAT etc, but is CT relief available?

Would anyone like to place a bet.....?
Stormrider

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By User deleted
08th Feb 2006 18:51

No relationship (i think)
Hello Simpleson

Thank you for your comment. As far as I can ascertain, there is no relationship between my client and the seller, other than the fact that the client was previously an employee and for the last twelve months has been providing some services on a contract basis.

Hopefully this qualifies the transaction for amortisation relief.

Many thanks

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By User deleted
08th Feb 2006 18:48

Could you expand a liitle?
Hello Mark

Thank you for such a comprehensive reply to my query on TOGC. Could you be so kind as to expand slightly on your 'word of caution'? I suspect that the seller will charge VAT. My client will be VAT registered before the event and therefore will reclaim the input tax. Are you suggesting that if HMRC argue that a TOGC took place they could refuse to repay the input tax, leaving my client in a position of having to get it back from the seller? If so, presumably the safest way is to proceed is to attempt to convince the seller not to charge VAT. If he is subsequently wrong he will have to send a further invoice to my client in the hope that he will subsequently repay the VAT.

Either way, i guess this remains the sale of goodwill and amortisation relief is applicable.

Thanks again

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By User deleted
09th Feb 2006 17:31

£35K VAT liability
Thank you again Mark. Very, very good advice

I am now clear of the risks and will liase with my client's solicitor, particluarly on this point.

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By User deleted
08th Feb 2006 13:45

"A business capable of operating.."
If the buyer is put in a position of being capable of operating the same business (or a part capable of being operated as such) then a TOGC could apply.

The tests of there being a TOGC include :
<> No break in trading
<> No intermediary, ie. business passes directly from one operator to another
<> Similar trade before and after
<> More than pure assets change hands

Taking over the benefit of existing contracts does look rather like a TOGC.

Now, a word of caution. If the seller IS convinced to charge the buyer VAT, then HMRC subsequently partake in unfair extraction / extortion of tax from innocent taxpayers, HMRC would argue that a TOGC did take place and the input tax claimed by the buyer is not allowed so must be assessed. £35,000 at stake in this instance.

From a safety-from-£35k-assessment viewpoint the seller might wish to charge VAT (in case it wasn't a TOGC) and the buyer might seek there to be NO VAT charged (in case adjudged to be a TOGC and therefore non-claimable).

In an ideal world HMRC would give a written ruling, but I think I've read reports that HMRC won't do this nowadays (maybe could cramp their style if trying to extract / extort unfair VAT assessments after the event?). A bit like not giving receipts for Tax Returns.

For further information of whether a TOGC is present or not, have a good read of the VAT publication 700/9 on the subject...

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_PublicNoticesAndInfoSheets&propertyType=document&columns=1&id=HMCE_CL_000093

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By User deleted
09th Feb 2006 13:26

Yes there's a serious VAT liability risk - £35k
The TOGC rules, if transaction falls within the definition of a TOGC, are mandatory (with one exception see later).

The business sale/purchase agreements that I have read through (for VAT advice purposes) in recent years have usually had clauses specific to VAT / TOGC. Such as ..."The parties consider the transaction to fall within...[the TOGC rules]" with a proviso that should HMRC subsequently say it's NOT a TOGC, then the buyer is obliged, on receipt of a VAT invoice, to pay the VAT to the seller.

In this instance if vendor insists on charging VAT, then a clause to protect the buyer is needed, ie. VAT to be repaid to buyer by vendor if HMRC subsequently deem the transaction not to be a TOGC. Not a lot of good though if seller disappears, liquidates, etc. subsequently.

So, I re-iterate my view that, should the transaction fall within the TOGC provisions, but VAT be charged, HMRC could assess the buyer and disallow the £35k input tax claim, leaving the buyer to recover the £35k from the seller. A risk best avoided. Co-operation between the advisors and parties to the contract is necessary here.

The only case that I am aware of where TOGC rules might be disapplied by the seller/buyer is in the case of a property rental business. In such a case disapplying the TOGC rules can significantly increase Stamp Duty on the transaction for the buyer, cause the buyer some cashflow issues (ie. VAT outlay to later reclaim) but protect the position of the seller. However, property rental businesses are a special case and I don't think the present case is such an enterprise.

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By User deleted
08th Feb 2006 15:09

CT relief -are they 'related parties' ?
We are not told of relationship between the two parties, so you will have to look at the particular relationship to answer the question.

Relief for depreciation of intangible assets is restricted where the parties are 'related'.

Definition is in FA 2002, Sch 29, para.95.

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