Neil Warren explains some pitfalls when buying an exempt business from a VAT registered seller.
When buying the whole or part of a business the transaction may be treated as a “transfer of going concern” (TOGC) for VAT purposes, in which case the seller doesn’t charge VAT on the sale of the business.
A recent post on ‘Any Answers’ asked whether VAT registration by the buyer was a necessary condition for the sale of the business to be treated as a TOGC, if the seller was VAT registered. The short answer is “yes”, but there are always complications.
Exempt business
Say the business seller has two business activities – he trades as a nursing home where all income is exempt from VAT, and he also runs a restaurant in the same town (VATable income). So he is VAT registered and is also partly exempt. He has agreed to sell the nursing home as a TOGC to John – what is the VAT position?
If a business sale meets all of the TOGC conditions (HMRC Notice 700/9, section 2) then the proceeds are outside the scope of VAT, i.e. the seller is not making either a supply of goods or services.
A key condition for TOGC to apply is that if the seller is VAT registered, then the buyer must also be registered or liable to be registered at the time of the transfer.
In other words, the buyer must either have a VAT number in place by the time the deal is completed or have a liability to register on the basis that the previous owner’s annual taxable sales for that business exceeded the registration threshold (£83,000 since 1 April 2016).
This is because the buyer treats the seller’s turnover as his own, usually meaning VAT registration is needed from day one.
The problem
John will be making only exempt sales when he starts to operate the nursing home, so he will be unable to register for VAT. So in this situation is it correct that the seller does not treat the business sale as TOGC? The answer is ‘yes’? If a business sale doesn’t meet the TOGC conditions, each asset should be sold according to its own VAT liability.
Note that any ‘goodwill’ transferred is standard rated if the TOGC rules do not apply because the buyer is paying for benefits such as customer contacts, trading name, business location, staff etc, all of which have a value.
The solution
The solution to John’s dilemma is fully explained in HMRC’s VAT TOGC Manual VTOGC4500
Common areas of difficulty: transfer of a wholly exempt business
A VAT registered business carrying on both exempt and taxable businesses, may transfer the wholly exempt part of his business as a going concern.
If the purchaser does not carry on some other, taxable, business, he will not be a taxable person. Accordingly, the taxable person conditions for the TOGC provisions to apply are not met and, therefore, the sale of the assets will be a supply (for VAT purposes). Where the assets are goods on which no input tax was deductible (because they were directly attributed to a wholly exempt activity) their supply is exempt. However, this does not apply to services.
Therefore any charge for goodwill means there will be a standard rated supply by the seller.
Planning point
If a high payment for goodwill is involved in the deal, it would make sense for John to plan to make some VATable sales when he takes over the nursing home.
Perhaps he could provide a guest suite for relatives to stay overnight? This income would be VATable as accommodation that is similar to a hotel. Alternatively, he could buy books and sell them to the residents. These would be zero-rated sales but still VATable.
He could then register for VAT on a voluntary basis and become a taxable person to meet the TOGC condition. The seller will not charge VAT as long as John has his VAT number before the date he buys the business. The problem is solved.
