I am considering purchasing a business but wanted to know whether there are any VAT problems associated when buying a business?

Ben Chaplin, Managing Director of Peninsula TaxWise responds:

VAT legislation allows, when you, a “taxable person”, buy a business as a going concern and operate the same type of business, also as a taxable person, the supply is outside the scope of VAT.

In VAT jargon this is a TOGC (transfer of a going concern) and the advantage to buying a business as a TOGC is no VAT is charged on the sale. This improves cash flow and in the case of a property rental business, reduces stamp duty.

A taxable person is any business registered for VAT or importantly liable to be registered for VAT. To demonstrate;

A non-VAT registered takeaway is selling the business to a non-registered buyer. The buyer does not wish to be registered for VAT, thereby gaining a competitive advantage against VAT registered competitors. The theory is, if the value of the sale of the business was below £70,000, the seller would not be liable to register for VAT and the buyer could continue selling food without VAT.

However if the seller’s income in the 12 months prior to the transfer, had crossed the registration threshold, but had failed to register, the purchaser becomes liable to register for VAT from the date of the transfer. This is because a “taxable person” includes a business liable to register for VAT. The consolation prize is that no VAT would be chargeable on the value of the purchase of the business as it would be outside the scope as a TOGC.

Next is someone actually buying a business? Buying shares in a business does not qualify as a TOGC because the trading assets of the business have not been supplied. There are numerous Tribunal cases where a supply was not a business but simply a sale of assets. This distinction is best illustrated by the following quote;

“A greengrocer’s business is no doubt to sell fruit, but the pound of apples which you buy can hardly be described as a purchase of part of the greengrocer’s business.”

Some factors which influence whether there is a business or not, include;
is there a sale of goodwill, business name, customer lists, stock, plant and equipment etc. The list is far from exhaustive and different factors will be more important depending on the type of business involved. There are also additional rules for buying a property rental businesses.

It is advisable that you speak about your individual case to a tax expert, should you have any concerns regarding the purchase.