Contracts have been prepared for the sale of your business to a person not yet registered for VAT. However, there is some argument about whether VAT should be added to the price. What’s the right answer?

Selling VAT free

If you’re VAT registered when you sell a business, or part of one, special rules apply. These say that the sale price must not include VAT. The transfer of a going concern (TOGC) rules treat the sale of a business as outside the scope of VAT where:

  • you’re transferring an entire business; or
  • part of a business which can operate independently; and
  • the buyer uses the assets transferred in the same kind of business; and
  • they are registered for VAT, or if not registered are registerable as a result of the transfer.

Risk of VAT

Where the sale doesn’t qualify as a TOGC it’s up to you as the seller to ensure that VAT is accounted for. If you don’t charge VAT, and it turns out you should have, you’ll have to pay it and recover it from the buyer. Even if the contract allows this it could be difficult, especially if the buyer hasn’t budgeted for VAT.

Tip. You should include an indemnity clause in the sale contract to cover the VAT that would be payable in the event the TOGC rules aren’t met. If there’s trouble with HMRC at least there will be no argument that the buyer should pay up.

Trap. You should not charge VAT as a precautionary measure if you’re certain the transaction meets the TOGC conditions. Apart from potentially causing problems with the sale negotiations, the buyer might not be entitled to reclaim it (because it’s not a legitimate VAT charge) and may sue you for it.

TOGC failure

The last of the conditions mentioned above can be tricky. According to the rules the buyer needs to “immediately become as a result of the transfer, a taxable person” , which means they must become liable to register for VAT. If the buyer isn’t already registered this might mean the sale doesn’t qualify as a TOGC.

HMRC’s view

HMRC takes a tough line where compulsory VAT registration doesn’t apply to the buyer. It requires the buyer to actually be registered at the time of the transfer. So it’s not enough for them to have applied for registration, even if they asked for it to be backdated to the time of the sale.

Tip. It’s advisable that before you sign the contract you obtain proof that the buyer has applied to register immediately after completion. This will minimise, but not eliminate, the risk of getting caught for VAT.

Intending trader

To make even more certain that you won’t be caught out if the buyer fails to register for VAT, you could insist that, once you’re at contract stage, the buyer applies for intending trader registration. This allows them to register before the sale as long as they can show HMRC that there is every expectation that they will have a business to register in the near future.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.