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What are the TOGC rules on selling a business?

What are the TOGC rules on selling a business?

Mike Wakeford

The transfer of a business as a going concern (TOGC) rules concern the VAT liability of the sale of a business. Normally the sale of the assets of a VAT registered or VAT registerable business will be subject to VAT at the appropriate rate.

Where the sale of a business includes assets and meets certain conditions, the sale will be categorised as a TOGC. A TOGC is defined as 'neither a supply of goods nor a supply of services' and is therefore outside the scope of VAT. Under the TOGC rules no VAT would be chargeable on a qualifying sale.

All the following conditions are necessary for the TOGC rules to apply
  • The assets, such as stock-in-trade, machinery, goodwill, premises and fixtures and fittings, must be sold as part of a 'business' as a 'going concern'. In essence, the business must be operating as such and not just an 'inert aggregation of assets'.
  • The purchaser intends to use the assets to carry on the same kind of business as the seller.
  • Where the seller is a taxable person, the purchaser must be a taxable person already or become one as the result of the transfer.
  • Where only part of a business is sold it must be capable of separate operation.
  • There must not be a series of immediately consecutive transfers.
  • There are further conditions in relation to transactions involving land.
The TOGC rules can be complex, and both the vendor and purchaser of a business must ensure that the rules are properly followed. The TOGC rules are also mandatory which means that it is imperative to establish from the outset whether a sale is or is not a TOGC. For example, if VAT is charged in error, the buyer has no legal right to recover it from HMRC and would have to seek to recover this 'VAT' from the seller.

 Why it is important to get the tax treatment right

The TOGC rules are compulsory. You cannot choose to ‘opt out’. So, it’s very important that you establish from the outset whether the business is being sold as a TOGC. Incorrect treatment could result in corrective action by HMRC which may attract a penalty and interest.
If all the conditions in paragraphs 1.4 and 2.2 of VAT Notice 700/9 are met, the TOGC rules apply and VAT must not be charged or accounted for on the assets transferred (except, in certain circumstances) on the premises, for example, land or property used in the business. Details of the circumstances in which you must charge VAT on the premises are set out in paragraph 2.3.

What If VAT is charged when it should'nt of been

If this is the case the buyer will not be able to reclaim this amount as input tax, because there was no taxable supply; and the seller will have to cancel any tax invoice issued and provide the new owner with a refund of the VAT charged - normally this will be by issue of a credit note or document giving similar effect.

If your in the process of transfering your business and need support Please get in touch with our Team who will beable to support you.