Yesterday I went down to Dover because I wanted to oversee some goods being imported after Brexit. When I had finished viewing the spectacle, my client chanced to catch sight of me from a distance as I was starting on my way home.
‘I’m pleased I was able to catch you today, as I’ve had a fair bit on my plate recently and could do with bouncing a couple of things off you,’ the conscientious practitioner observed.
‘Of course, always happy to help if I can. What have you been up to recently?’ I said.
‘Mainly dealing with a large number of clients who have decided to sell their businesses or to buy other businesses. Many want to sell and buy shares, but there is a growing enthusiasm to purchase the assets – the buyers don’t want to inherit any risk in the company’s history,’ said the conscientious practitioner. ‘But this is where I could do with your advice – am I right in thinking that asset purchase agreements (APAs) are VAT-free?’
‘Well yes, if it’s a transfer of a going concern, or TOGC for short; but in taking the right steps, both sides must place their feet precisely,’ I said.
‘Ah, I thought that the purchaser simply had to continue the same kind of business as the vendor,’ said the conscientious practitioner.
‘That’s true, but it is only one of a number of requirements,’ I said. ‘If any one of those requirements fails, the transfer is not VAT-free. For example, the business activity must be precisely determined.’
‘Can I give you an example I’m dealing with at the moment?’ asked the Conscientious Practitioner. ‘One of my clients is buying a business that creates Greek columns and sells them. As the moulds are quite pricey, they keep them ring-fenced in a separate company.’
‘That’s not uncommon,’ I replied. ‘You would want to find out if that separate company rents the moulds to another company in the vendor’s group, which then uses them to create and sell the Greek columns. If they do, then the purchaser might have to continue both the rental business and the sales business separately.
‘HMRC has challenged continuation in many ways over the years, such as a purchaser taking time out to refurbish the premises or changing elements of the business (staff, materials, outputs and so on). A consecutive transfer by the purchaser also prevents continuation of the business, invalidating the TOGC so it’s important that things remain the same for a while.’
‘I knew there were awkward questions there,’ said the Conscientious Practitioner. ‘Fortunately, there are no such issues in this case, but given the name “transfer of a going concern”, I’m getting concerned whether this business will qualify as a “going concern”. It’s teetering on the edge of going under.’
‘It’s a pretty common question at the moment. I’d lean towards an optimistic view. Even an insolvent business can still be a going concern, but there are times when even that test is failed. It does need thinking through,’ I said.
‘Thanks, that’s useful insight,’ said the Conscientious Practitioner. ‘Also, am I right in thinking that the purchaser must be VAT-registered as well?’
‘Only if the vendor is VAT-registered, but there are quite a few other tests to think about. For example, just while we’re talking, is there a property among the assets?’ I asked. ‘Special rules apply where property interests are transferred – and they are time-sensitive. It’s also worth remembering that the capital goods scheme will be inherited by the purchaser too.’
‘What do I need to do about the capital goods scheme?’ asked the Conscientious Practitioner. ‘And is there anything else I should be asking about?’
‘You would normally expect the vendor to provide details of their calculations to date. The purchaser can then continue the capital goods scheme calculations in their own VAT records,’ I said. ‘As far as other things are concerned, a key area to watch is VAT groups. A 2015 court case (Intelligent Managed Services Limited [2015] UKUT 341 (TCC)) made HMRC change its policies for TOGCs involving VAT groups. We can still make the TOGC work if there is a VAT group, but we might need different steps.’
‘I had a feeling it would be more complicated than on first sight,’ sighed the Conscientious Practitioner.
‘It is, but it’s worthwhile. Removing VAT from the transfer of a business reduces the risk for the purchaser for many years to come and, as a bonus, if there’s a property involved the stamp duty land tax will be reduced too. This is great for the purchaser, but your vendor clients must be careful, they are taking the risk of not charging VAT when the TOGC really depends on the purchaser’s actions. It’s a risk that needs to be managed in the contract,’ I warned.
‘That is really helpful – I will talk to my clients. If we get stuck on a VAT group or something, can we come back to you?’ asked the Conscientious Practitioner.
‘Of course,’ I said. ‘That’s what I’m here for! I’ll look forward to it.’
As the sun went down, I began to think about the unnecessarily complex VAT rules on residential conversions.
Key points:
- Asset purchase agreements are VAT-free in the case of a transfer of going concern (TOGC) where the assets of a business are being sold, but there are some requirements to satisfy.
- One requirement is that the purchaser has to continue the same kind of business as the vendor – but the business activity must be precisely determined.
- A consecutive transfer by the purchaser also prevents continuation of the business, invalidating the TOGC so it is important that things remain the same for a while.
- Given recent events, one must also think about whether the business being transferred as a TOGC is actually a going concern.
- The purchaser will need to be VAT-registered only if the vendor is VAT-registered, but if there is property among the assets, special rules apply where property interests are transferred.
This article was originally featured in Taxation Magazine.
