One of those perennial questions: - how does a Transfer of a Going Concern (TOGC) interact with VAT registration?
A TOGC requires that a business run by a ‘taxable person’ is transferred to another ‘taxable person.’ The supply of the business itself is VAT free, subject to meeting various conditions. A taxable person is a person who is, or who is required to be, registered for VAT. Thus, where a business which is already registered for VAT is then transferred to another person, the taxable supplies made by the transferor are treated as being made by the transferee for the purposes of his VAT registration. (VAT Act 1994, Sch 1, para 1(2) refers to this, and also s49(1).)
Depending on the exact circumstances, there are a number of possible outcomes. As with any significant business decision, professional advice should be sought.
One common scenario is where a sole trader who is not registered for VAT, transfers his business to a limited company. The company is not registered for VAT. Does the sole trader’s turnover count towards the company’s turnover for VAT registration purposes? No. Since, at the time of transfer neither was a taxable person, there was no TOGC. This means that the company can ignore the turnover of the sole trader to determine whether it should register for VAT.
HMRC Internal Guidance V1-28, para 10.2.1. confirms this point. It includes this statement: “If the transferor is not a taxable person at the time of the transfer the transferee shall not be deemed to have carried on the business prior to the transfer.”
Comment: Where a person repeatedly transfers his business from one legal entity to another simply to avoid his liability to register for VAT, then I would that to be avoidance, and I would expect HMRC to take action. HMRC guidance on this point seems to have been redacted!