why is this all of this transaction a taxable supply

why is this all of this transaction a taxable...

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A brother and sister have been trading in partnership for several years until the sister recently decided to sell her 50% share in the business to her brother, who continues as a sole trader.

TOGC rules do not apply ( that's another story altogether! ) so HMRC require a VAT only invoice to be issued to the partners.

The doubt in my mind is that the transaction is actually only the sale by the sister of her half; the brother is not required to sell himself what he already owns, let alone pay himself anything.

So, are HMRC correct in viewing this as a sale by the partnership of the entire asset and requiring a 100% invoice?

The solicitor acting for the Clients tells me that he believes the basis of the sale is only for the sister's half and that he feels a completion statement to reflect only her 50% share is all that he needs to prepare.

Is he wrong, or is this one of these occasions where tax law and commercial law view things differently?

My concern is the size of the VAT only invoice and the potential penalties.

Many thanks to anyone leaving a comment.

Replies (7)

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By johngroganjga
25th Sep 2014 09:17

You say "VAT only invoice to

You say "VAT only invoice to be issued to the partners".  Do you mean by the partners?  If not, who do HMRC say the invoice should be issued by.  If you mean to, presumably the invoice is to be addressed to the brother as a sole trader (?).

Is the point perhaps that HMRC are saying that for VAT purposes the partnership is disposing of the whole business to the brother?  Whether that's right as a matter of VAT law I won't comment on.  But is there any particular problem if the brother is able to recover the input VAT.

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Replying to Tom 7000:
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By csgas
25th Sep 2014 09:47

Sorry, the invoice will have to be issued by the partnership to the sole trader who will, in due course, be able to recover the input tax and so pay himself ( and his sister ) the money needed to pay the output tax.

Obviously, if the TOGC rules had been correctly applied this whole situation would have been avoided.

The cash-flow problem is secondary to the intention of HMRC to impose a penalty as it was assumed that TOGC had been correctly dealt with. Now, three months after the event, HMRC's local compliance have picked this up and are insisting on a VAT only invoice and, once paid, they have stated that they will be looking to impose the second tier penalty of between 15% and 30%.  ( I personally think that where there has been no loss whatsoever to the Revenue that any penalty is unconscionable.)

I merely wonder if their interpretation of the transaction, which is no longer a TOGC but a sale of a bundle of assets, can be looked at as only requiring a 50% invoice so mitigating the potential penalty.

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chips_at_mattersey
By Les Howard
25th Sep 2014 09:28

sale of partnership share

John is right about the brother being able to recover input tax.

On the subject of penalties: if a 'reasonable excuse' defence does not work, then 'special circumstances' should. In the situation you describe, no penalty should apply.

I am also concerned about the principle and the quantum of any assessment. Let me, or other VAT specialist, look at the correspondence, and comment on it.

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By johngroganjga
25th Sep 2014 09:56

I think you need proper specialist advice.  If you want recommendations you may get some if you indicate where you are based.

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Replying to HeatherSimpson:
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By csgas
25th Sep 2014 10:59

TOGC and penalties

Many thanks for your thoughts.

I have since been talking with the tax advisers connected to my PI Insurers who have no doubt that HMRC will view the sale as being from the partnership to the sole trader of the partnership asset and that the VAT only invoice must reflect the full value.

On the question of penalties, HMRC have already said in their opening letter that, in their view, the failure of the TOGC - the sole trader's option to tax was not in place "on or before" the transfer - represents not taking reasonable care; the fact that there will be no loss to HMRC is of no consequence and the best I can hope for is a reduction of the 30% penalty down to 15%.

They may well accept a belated notification to opt, but that will not affect the initial failure which they point out is a statutory requirement.

I hope that this serves a warning to others that, once again, ignorance of the law is no excuse - even where no-one, least of all HMRC, will suffer any loss.

 

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By Portia Nina Levin
25th Sep 2014 11:11

Option to tax?

What the F has been opted?

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By neileg
25th Sep 2014 11:17

Has the sole trader retained the VAT number

If the VAT number has transferred to the sole trader, I would suggest that a in invoice is rather daft in these circumstances.

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