Deregistering for VAT: A transfer of a going concern trap
Andrew Needham highlights a potential VAT trap following a previous transfer of a going concern.
When you buy a business or part of a business as a transfer of a going concern (TOGC), the vendor does not charge VAT, as it is not treated as a supply of either goods or services for VAT purposes. This means that you can acquire a business without the cashflow disadvantage of having to pay out the VAT and then waiting up to four months to receive the VAT refund.
De-registering for VAT
When a business de-registers for VAT, it has to account for VAT (known as a ‘deemed supply’) on the value of stock and assets on hand at the time of de-registering where the total VAT on the current market value of the goods is over £1,000 and VAT has been recovered on their purchase.
This means that if a business owns a car and de-registers for VAT, it does not have to pay VAT on the value of the car as no VAT was recovered on its purchase, because there is a block on the recovery of VAT on cars where there is any private use. Similarly, if a business is partly exempt and did not recover any VAT on the purchase of an asset relating entirely to its exempt business activities, no VAT is due on de-registration.
However, if a business owns a property on which the option to tax has been exercised and it claimed back VAT on its purchase, VAT will be due on its current market at the time of de-registration. If a business has opted to tax a building but did not reclaim VAT on its purchase, VAT is not due on de-registration.
Assets acquired in a TOGC
Many advisers think that as assets acquired as part of a TOGC did not have VAT charged on them, when a business de-registers for VAT there can be no VAT to pay as no VAT was reclaimed. In fact, that is not the case.
HMRC take the view that if the original owner of the business that was purchased reclaimed the VAT on those assets, VAT is due on their current market value when the business de-registers.
When you acquire a business as a TOGC, you should retain the original owner’s records or take copies of them, so that you know if VAT was reclaimed on the relevant assets.
If a business acquires a property as part of a TOGC of a property rental business, it will have had to opt to tax it in order for its purchase to be treated as a TOGC; so even though no VAT was claimed on its purchase, VAT on the current market value is due when the business de-registers if the previous owner had recovered the VAT on its original purchase.
If you own an opted commercial property acquired as part of a TOGC, you will have to consider the costs of accounting for VAT on its current market value before de-registering for VAT, as the costs may be so high that de-registration should be deferred.
Partial exemption trap
If a partly exempt business acquires assets as part of a TOGC and any VAT at all was recovered on them by the original owner, VAT is due at de-registration on its full value, not the percentage originally recovered.
When you acquire assets as part of a TOGC, you are not charged VAT on them but when you de-register for VAT, you will have to account for VAT on their current market value if the original owner recovered the VAT on them.