How does VAT work when buying a business?

Do I have to pay VAT when I buy an existing business?

When you are buying a business it is important to make sure you understand the VAT implications of the purchase and how to notify HM Revenue and Customs (HMRC). Quite often this is left to the last minute in the purchase process and if wrong, it can be costly.

When a business is sold as a going concern, the Transfer of Going Concern (TOGC) rules apply automatically, subject to certain criteria being met. This would mean that no VAT is chargeable and no supply has taken place for VAT purposes.

However, if the seller charges VAT incorrectly and the buyer subsequently makes a claim for input VAT, HMRC can deny the buyer’s input VAT claim.   As the buyer, you could be left in the position of having paid VAT to the seller and then having to recover it.  This could be a substantial cashflow disadvantage, which is why it is important to address the VAT treatment early on.

So, what can you do to be prepared?

When you start to think about buying a business, you should be aware of the criteria that should be met to treat the sale as a TOGC and therefore ensure that no VAT is charged.

1. Assets must be included as part of the purchase.
2. The purchase should include stock, plant and machinery, goodwill, premises and so on.
3. If the seller is a taxable person, then the buyer must be a taxable person or become one, as a result of the purchase.
4. As the buyer, you must intend to use the assets and continue the same kind of business as the seller, however, it does not have to be exactly the same kind of business.
5. If part of a business is being sold, that part must be capable of being operated separately.
6. There must not be a series of consecutive transfers of the business.

What do I need to know if land and property is included in the purchase?

There are additional criteria to fulfil when land and property is involved.  It is possible for the land and buildings element of a sale to be chargeable to VAT, whilst the rest of the assets comply with the TOGC rules and are not chargeable to VAT.

It is not within the scope of this blog to detail the rules here, but it is strongly recommended that you seek professional advice where a business purchase includes land and buildings.

Author: Helen Griffiths, Accounts and Audit Manager, Plus Accounting

Any views or opinions represented in this blog are personal, belong solely to the blog owner and do not represent those of Plus Accounting. All content provided on this blog is for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site

Date published: 18 January 2022

Links

Here are some useful links to HMRC’s website concerning:

Transfer of Going Concern

Capital Goods Scheme

Opting to Tax Land and Buildings

It is strongly recommended that you take professional advice before buying a business to ensure you understand the VAT implications, along with those relating to income tax and how best to structure the purchase.