VAT on sale of exempt business

Is the sale of goodwill from a VAT exempt business exempt before consideration of the TOGC rules.

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I have an interesting technical question that has been bugging me, so collective insight greatly appreciated.

Scenario: an unincorporated business is wholly exempt from VAT as it provides healthcare services. The goodwill and assets of the business are being sold to a new, unincorporated owner such that the new owner can and will continue the same business. The consideration for the sale is in the millions. The seller is not VAT registered, as they operate an exempt business. The buyer is not VAT registered, and does not intend to be, nor would they be required to be if they operated this business ignoring the transfer.

  1. Let's consider TOGC first.

    Per HMRC VTOGC3650 if the seller is not a taxable person the supply of assets is a TOGC regardless of the status of the buyer if all other conditions are met. So, we can rely on TOGC status if we meet all other conditions, specifically (in this scenario at least) that: (a) the assets of the business are sold, (b) the buyer intends to carry on the same kind of business and (c) there is no immediate consecutive transfer. Noted re: complexities around property, sale of parts of a business etc.
     

  2. We could stop there and rest easy. However, most healthcare sale agreements we come across do not have a clause relying on application of the TOGC rules (e.g. vendor and buyer will do all they can to ensure compliance with the Special Provisions order). Instead, they simply warrant that the vendor is not and has not been required to be registered for VAT purposes.
     
  3. This raises a question, is the sale of goodwill and assets in this scenario taxable at all, before consideration of the TOGC rules?
     
  4. Per HMRC VATSC03580, sale of goodwill is subject to VAT by virtue of s5(2)(b) VAT Act 1994.

    Does it matter what the nature of the goodwill is, i.e. whether it relates to a taxable or exempt business? In other words, is all goodwill taxable even if it is goodwill of an otherwise exempt business?

    I can see an argument that all goodwill is taxable arising from the legislation. I struggle to see any argument that the nature of the business matters, i.e. the sale of goodwill generated from an exempt business is itself exempt.
     

  5. If the underlying nature of the goodwill does not matter (i.e. the goodwill of an exempt business is taxable if sold), presumably the sale of said goodwill for anything over the registration threshold would require the vendor to register for VAT, save for application of the TOGC rules. 
     
  6. If the underlying nature of the goodwill does matter (i.e. the goodwill of an exempt business is not taxable if sold) what is the reference (legislative or otherwise) for this.

I cannot find any detailed guidance or insight into this question, presumably because the general assumption is that the TOGC rules apply (or can apply) and that's the end of it. The only relevant guidance refers to a partially exempt business selling a distinct, exempt part of its business to a non-registered buyer, a scenario which disapplies the TOGC rules. 

But I would like to establish if you have to rely on the TOGC rules, or whether the supply of goodwill (and assets) on the sale of a business is itself exempt if the underlying business is exempt.

All insight much appreciated.

Replies (11)

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By Paul Crowley
10th Jul 2024 12:07

There is no VAT on goodwill, usually.
Does that answer the question?
I googled 'is there VAT on goodwill'
'From 1 January 1983 Customs and Excise will treat all sales of the goodwill of a business as taxable supplies except where they are specifically relieved by law. Unidentifiable goodwill, valued as the residual difference between the business as a whole and the sum of its identifiable assets, is currently treated as outside the scope of VAT. Normally goodwill is sold as part of the assets of a business transferred as a going concern. Such sales will be relieved from tax if the transfer meets the provisions of the [VAT (Special Provisions) Order 1995 (SI 1995/1268), ].

If a business is being sold with other assets then VAT is not usually a problem.

When Jason replies, trust what he says.

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By JazzySasha
10th Jul 2024 15:04

Have a look at VTOGC4300.

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Replying to JazzySasha:
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By awaf
10th Jul 2024 15:23

Thanks, but that specifically references a VAT registered business selling an exempt part of itself. In my scenario, the vendor is not VAT registered.

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By Justin Bryant
10th Jul 2024 15:50

Possibly I misunderstand the question, but in my view it's not VATable as it's not a supply by a taxable person under s 4 VATA, as the seller is not VAT registered nor required to be so if he's not making any taxable supplies under Sch 1 VATA (under para 1(7) a sale of capital assets is not taken into account in determining if VAT registration is required and therefore the transfer of the business/part thereof cannot give rise to a liability to register for VAT).

As to potential ToGC treatment for non-taxable persons, HMRC's view is here: https://www.gov.uk/hmrc-internal-manuals/vat-transfer-of-a-going-concern...

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By taxdigital
11th Jul 2024 09:31

Here is a quick answer:

VAT applies (s.4) where:
1. There is a taxable supply of goods or services,
2. Made in the UK,
3. Made by a taxable person
4. In the course or furtherance of any business carried on by him

________________________

Taxable supply
• You have correctly answered part of your question in saying that sale of goodwill is a supply of services under s.5(2)(b).
• Now, a taxable supply is one which is other than an exempt supply made in the UK (s.4(2).
• A supply is an exempt supply if it is of a description for the time being specified in Schedule 9 (s.31(1).
• Since sale of goodwill is not one covered by Sch 9, it’s a taxable supply.

Made in the UK
• I presume the transaction is taking place in the UK for this box to be ticked.

Made by a taxable person
• A taxable person includes a person required to be registered for VAT (s3(1).
• A person will be required to be registered for VAT, and consequently will be become a taxable person where the taxable supplies they make exceed the registration threshold (Para 1(1), Sch 1).
• It follows then that should the value of the goodwill sold exceed the registration threshold, the business will be obliged to register for VAT and consequently will become a taxable person.

In the course of business
• For VAT to apply the supply should have been made in the course of business.
• Is the sale of a business a supply made in the course or furtherance of a business?
• Well, yes, because the legislation say “anything done in connection with the termination or intended termination of a business is treated as being done in the course or furtherance of that business”. (s.94(5).

Given this quick analysis my view is that unless the business takes the TOGC (s.49 etc) route, VAT will apply on the sale of goodwill.

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Replying to taxdigital:
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By awaf
11th Jul 2024 10:03

This is very methodical and sets out the issues nicely, thank you. Certainly gives clear points to test in the legislation or otherwise (not that I disagree with your conclusions).

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Replying to taxdigital:
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By Justin Bryant
11th Jul 2024 10:24

Why is the sale of goodwill not excluded per my above comment? See: https://www.gov.uk/hmrc-internal-manuals/vat-registration-manual/vatreg0...

Or perhaps that JC bloke can confirm all this (I expect it's a rather trivial question for him)? That said, we rarely (if ever) disagree. See:

"The term ‘capital assets’ therefore covers goods and services which have been used in a business as ‘equipment’. It includes premises, plant, machinery, office machinery, computers, office furniture, used company cars, patent rights which have been exploited and which are sold outright, and goodwill."

https://www.gov.uk/hmrc-internal-manuals/vat-registration-manual/vatreg0...

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Replying to Justin Bryant:
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By taxdigital
11th Jul 2024 10:55

Back to matters of daily bread - will have a look during the weekend.

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Replying to taxdigital:
By Ruddles
11th Jul 2024 11:16

One of those rare occasions where I fully agree with Justin. There is no question that goodwill is VATable, just like the other assets mentioned. The fact that it is, by elimination, a supply of services does not alter the fact that it is capital in nature, and is therefore excluded from turnover when considering requirement to register.

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Replying to Justin Bryant:
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By taxdigital
13th Jul 2024 10:53

I did overlook this part. Having now had a look at this, Para 1(7) is clear , supplies of services that capital assets (which goodwill is) do not count towards VAT registration threshold. In the absence of any other taxable supplies, and with goodwill disregarded, the threshold will not have been hit. Consequently, the vendor will not be required to register, and will not, therefore, be a taxable person. Since they are not a taxable person, no VAT applies on the sale of the goodwill. In other words I agree with your conclusion.

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Replying to taxdigital:
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By awaf
17th Jul 2024 20:44

Thanks all for your insight - one of those problems that seemed intractable from our perspective but just needed some logical thinking!

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