Helping client to buy business with property opted to tax.

Helping client to buy business with property...

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Dear all,

I have recently been asked by one of our client to advise about the best way to buy a new business.

Business with property. Total worth of the business is £445,000.00, out of which £270,000.00 is the worth of the property. The property is “opted to tax”. The client is planning to take the existing new business to the next level.

What would be the best way to buy this business and to avoid paying VAT on the purchase of property? The business is VAT Registered.

Can the property be bought separately as TOGC and the business separately as TOGC? Or the whole business should be bought as TOGC?

Any advice will be highly appreciated.

Regards,

Shams

Replies (8)

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chips_at_mattersey
By Les Howard
16th Dec 2013 16:40

TOGC?

A TOGC can be a VAT-free transaction. There are various conditions, including that the new owner is taking over the assets to enable him to continue running the business; and he will continue in the same type of business.

Where the Vendor has opted to tax (and no explanation is provided as to why he has done this), then the Purchaser must also opt to tax to ensure that the property falls within the TOGC. His option has to pre-date the Completion of the sale (and also of any deposit).

However, the purchaser might consider not opting. He would have to pay VAT on the building only, which, presumably he could recover. He would have to pay the VAT, and then claim it, so there are cash flow questions to consider. (You might also need to ask a question about SDLT; I cannot answer such a question.)

 

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Replying to faheem.aslam:
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By accountsdirect
16th Dec 2013 17:42

TOGC

Thank you very much taking the time to answer my queries.

So if the purchaser go for not opting the property, then the purchaser will pay standard rate VAT on property while the business would still be TOGC, right?

Thanks and Regards,

Shams

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By stanbu
16th Dec 2013 17:00

Whole business TOGC

If the property is used in the business, then the whole business, including the property, is a TOGC. The property is included, but the purchaser has to be registered for VAT and also opt to tax the property, and notify HMRC that they have done so, on or before the first taxpoint of the purchase. The purchaser also has to confirm to the vendor that their option to tax will not be disapplied. Watch out for any deposit creating a taxpoint. If these conditions are not complied with, the property is standard rated, even though the rest of the business is a TOGC.

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By spidersong
16th Dec 2013 17:05

Is the property the / a business?

VAT is very detail orientated so to be pointed in the right direction you'd probably need to be telling us a fair bit more about the existing business and the treatment of the property so for example:

Is this seller a ltd or a sole prop?

Is the building used in the business (factory, shop, etc.), or is it a business in its own right (rental property)? (Given the option at least some part has presumably been rented in the past but is it 100% or 10%, or currently 0%)

Is it a mixed or wholly commercial property (or even holiday home/hotel type building)?

Are there sitting tennants?

Is it under 3 years old?

Do you know what the value of the building when bought was (i.e. is it a capital goods scheme item in the sellers hands and are there outstanding CGS adjustment periods)?

Why are they so keen to avoid the VAT; is it just for the c. £1620 SDLT saving, or are they looking to use it for exempt purposes at some point and so worried about CGS or exempt attributable tax?

 

Property transactions can be one of the more complex areas of VAT planning, and little details can change things quite significantly, so have you thought about buying in specialist advice (and putting the risk on their PII rather than yours!)?

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Replying to johnjenkins:
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By accountsdirect
16th Dec 2013 17:49

Property is fully used for the business and no rental income

Thanks a lot for taking time to answer. The property is fully used for business and there is no rental income coming from property for the last few years.

Now the purchase might be interested in buying the property at standard rate and declare opt out of tax and the business as a TOGC, will there by any problem with this? In this case the property can then be used for renting business too, right? one last point, if the purchase choose to go ahead with the above option, does it mean the property and business will/should be bought by two different companies?

Best Regards,

Shams

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By julian.sims
16th Dec 2013 17:14

No rental business

To expand on the previous answers, the property could only be a TOGC separate from the sale of the whole business if it was already used in a 'rental business' - as mentioned above option to tax would be required as well.  So if the property and business are already separate entities/registrations, could be separate TOGC's.

An owner occupied business cannot be a TOGC when acquired to be let even to buyers own company.

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chips_at_mattersey
By Les Howard
18th Dec 2013 09:53

Property Transfer & TOGC

spidersong is right; you should consider having contact directly with a VAT Specialist, to ensure all the details are looked at carefully.

In principle, I see no reason why you shouldn't transfer the property to NewCo1 and the business itself to NewCo2, but you will need contract details to be clear, and checked for VAT implications.

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Replying to Red Leader:
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By accountsdirect
18th Dec 2013 12:33

Thank you.

 

I  have advised my client to hire a specialist. I will share any formal response here too.

 

 

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