Independent VAT Consultant
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VAT: Transferring a business after lockdown

Has HMRC relaxed the VAT rules for business transfers where there has been a significant break in trading? Neil Warren investigates.

7th Oct 2020
Independent VAT Consultant
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a Brighton hotel next to a coronavirus sign

When a business is sold, the proceeds are usually outside the scope of VAT if certain conditions are met by the buyer - a transfer of going concern (TOGC). It is deemed that there is neither a taxable supply of goods nor services.

The most common rule is that if a seller is VAT registered, then the buyer must also be registered or liable to be registered when the transfer takes place. But another important condition is: “There must be no significant break in the normal trading pattern before or immediately after the transfer” (VAT Notice 700/9, para 2.2.7).

What is a trading break?

The most common example of a trading break that does not affect a TOGC outcome is when the new owners keep the premises shut for a few weeks, possibly months, while they carry out redecoration, improvement works or other changes. This is absolutely fine, assuming the other TOGC conditions are met.

The other common situation where a trading break is acceptable is when a business is closed for seasonal factors. This is very common with hotels and guest houses.


Seaside Guest House trades from April to September each year. The business is VAT registered and the owner sold it on 31 October. Even though there will be no takings for the next five months, the sale will still qualify as a TOGC because the reason for the closure is due to seasonal issues.

Covid 19 challenges

The CIOT raised the issue with HMRC about businesses that closed in March 2020 due to the lockdown, where activity had clearly ceased and staff put on furlough or made redundant. What would be the position if these businesses were sold many months, possibly years later, when normal activity has resumed?

HMRC response

HMRC’s response to this very important question is listed on the CIOT website.

It is reassuring that HMRC will treat Covid-19 trading breaks in the same way as the seasonal guest house. But there comes a point when a business has ceased to exist and therefore monetary proceeds can only relate to asset sales, standard rated in most cases. The words “completely ceased” are quoted in HMRC’s response.

Challenge for buyers

My main concern is the potential challenge for buyers of a business, where the seller insists on charging VAT because there has been a long trading break because of Covid-19.

For example, all stock might have been sold off; fixed assets put to a different use or sold; staff made redundant etc. Input tax can only be claimed if VAT has been correctly charged in the first place.

Imagine HMRC’s reaction if a post Covid-19 deal has charged 20% VAT, creating a big repayment VAT return for the buyer, but the officer considers it was still a TOGC. The input tax claimed is likely to be challenged.    

Use HMRC’s manual

In most situations, it will be fairly clear if there is a sale of assets or of a business. A charge for goodwill is an indicator of a business sale but it is not conclusive. Each deal must be looked at on a stand-alone basis.

The CIOT advice is: “HMRC should be contacted where there are individual cases with less straightforward circumstances.” 

But how long will it take for HMRC to receive the facts of a proposed deal, review the information and possibly ask more questions, and then eventually give a written reply that gives legal certainty to the taxpayer? I suspect this could be a long period of time, creating a potentially deal-breaking delay.

The priority is for buyers, sellers and advisers to make full use of HMRC’s guidance and make their own decision. To this end, see the HMRC VAT manual: Transfer of a going concern.

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