Simple VAT question - probably a complicated answer though !!

[fathippy]

When a business is sold as a "Transfer of a going concern (TOGC)" the only way it is not subject to VAT is if both parties are VAT registered. If the business in question would not on its own be large enough to merit VAT registration then how soon can the new buyer de-register? Is this something that has been looked at before and clamped down on, ie new buyer de-registers on day one, or is it just sensible business practice.

 

[3pic]

As a ToGC involves the transfer of a business, the turnover of the sold business counts towards that of the buying business - after all, we are transferring a business.

So if the business being sold is VAT registered, then the buying business must also be VAT registered as it will, by default, be over the VAT registration limit.

Any VAT registered business can de-register for VAT if they go below the VAT de-registration limit.

Arguably, if a business being sold under ToGC is a voluntary registration with say a turnover of £30k a year, the buying business would have to register for VAT as well to effect the ToGC (as it is a condition of ToGC), but then it could arguably de-register for VAT threafter as it is way below the de-registration threshold.

But its a good question....you're not planning anything are you?

 

[spidersong]

My opinion: It's largely sensible business practice, and day 1 could be entirely reasonable to deregister.

Here's my reasoning;
A person is liable to register if their business supplies are above the registration limit (Para 1 (1), Sch 1, VAT Act 1994), if we have a transfer of a going concern then that going concerns supplies in the preceding year are taken into account (Para 1(2) of Sch. 1).

If the going concern is not above the limit and there are no other supplies then there is no liabilityto register. However to get TOGC status you need to be registered so you need to establish an entitlement to register.

To be entitled to register you must satisify the commisioners that you make or intend to make taxable supplies (Sch 1, Para 9). That's fine the recipient will presumably continue trading and making taxable supplies (as per Para 4 of the Act a taxable supply is any supply made in the UK other than an exempt one, so it's not necessary to be, or continue to be registered to make taxable supplies).

Having established they can register, the law gives no minimum length of registration, and they are entitled to deregister if they can demonstrate they have no liability to be registered (i.e. turnover below dereg limit (para 1 (3) of sch 1)).

Registration is normally treated as from midnight of the given date, and dereg to midnight of the given date so if you deregister on day 1 you've been registered for a day, and so long as that day is the date of transfer of the business you've met the registration condition.

The fact that you make no taxable supplies during the course of the registration does not change your entitlement to registration. I can find nothing in Para 49 of the Act, Para 6 of the VAT regulations 1995, or the VAT (Special Provisions) Order 1995, which are the main bits of legislation dealing with TOGC, which stops this treatment.

The only caveat is of course that the transfered assets will be assets on hand for declaring on the final (first) retrun subject to the £1000 deminimis amount, and any Capital Goods Scheme liabilities will need accounting for.


And although my memory may be failing me I seem to remember processing at least one deregistration on a registration entered into for this very purpose when I was managing a HMRC dereg section. Also in the end it's no loss to HMRC so not even tax avoidance, if the company didn't transfer and deregistered instead then the effect on HMRC coffers would be exactly the same as if they transfered and the new company deregistered.

Sorry rather a long winded way to say go for it. I started the reply expecting a couple of issues to pop up but as I read the law they didn't and I couldn't be bothered to delete it all and just write 'yes- go for it'

 

[fathippy]

But its a good question....you're not planning anything are you?

Funnily enough I am - nothing untoward, but we want to sell a small shop which is run on its own turning over less than the VAT threshold. Since we are a much larger entity there is an obvious synergy for a new buyer to run it without the VAT element. This is not a connected transaction or anything other than standard divestment of non-core assets, however it struck me that any punter buying it as a sole trader would either have to stump up an extra VAT amount on the purchase price or i would have to take 15% less of the headline price to account for the VAT. Then I thought it would be pretty easy for the new guy to register for VAT, effect the transaction as a TOGC, and then de-register (correctly) straight afterwards. Whilst this seems to be within the law at all points, it seemed like the sort of thing HMRC would pick up on and try to put in the "structured transaction" bucket.

If anyone has seen this happen before with no consequences please let me know!

 

[fathippy]

Also in the end it's no loss to HMRC so not even tax avoidance, if the company didn't transfer and deregistered instead then the effect on HMRC coffers would be exactly the same as if they transfered and the new company deregistered.

Not sure if that is the case - if joe punter pays £50k of his childrens inheritance for the business in total without being VAT reg, then the seller, being VAT registered will have to pay 3/23rds of that to HMRC. If the procedure above were to take place, the transaction would be free of VAT as a TOGC and the seller would keep the entire amount.

Please correct me if I am wrong.

 

[3pic]

Love your Theo quote.

Hello, I'm Peter......

As the seller you would have charge VAT on the sale if it wasn't a ToGC, it sounds like you've agreed a sale figure of £50k (inclusive) and so if a VATable transaction you'd have to lose 15% of that £50k.

Here's HMRC's link to ToGC :-

http://customs.hmrc.gov.uk/channels...ntent&id=HMCE_CL_000093&propertyType=document

I post the link here so you can work it out for yourself, but from what you've posted it does sound like a ToGC - that is, you are selling a part of your business that can 'stand alone', the buyer intends to carry on the same business (a retail shop) as the two main hurdles to get over.

Buyer can register for VAT BEFORE the ToGC, then once deal completes, they can then de-register as turnover (both pre-purchase and going forwards will be below the de-reg threshold.

A bit of a pain to have to register only to de-register but the VAT saving is the incentive. There's no big issues with ToGC other than if the conditions for ToGC are met then you HAVE to treat as a ToGC, you can't think "Not sure, I'll charge VAT anyway" as HMRC love this (not!). The only other thing to be careful of is that the buyer must be in the same position as the seller hence why the buyer MUST be registered before the deal goes through, otherwise, technically it is NOT a ToGC and then 2 years down the line HMRC will inspect you and ask for the VAT!.

 

[fathippy]

Actually I think the cost savings may be slightly less than the whole 15%. I assume that if the 50k is split 20k lease, 20k fixtures, 10k goodwill (for example) then only some of it will be liable to VAT - ie not the lease, definitely the fixtures, and [dont know] on the goodwill.

That is to say that another way of looking at this issue is to address the apportionments in a more efficient manner.