We were recently asked to provide VAT advice in respect of a VAT registered business, which made both VAT-able and exempt supplies and was selling a VAT exempt part of its business, such part being capable of separate operation. The question was would VAT apply to the sale of the business, or could this be structured as a transfer of a going concern (TOGC)?
It is true to say that a VAT registered business which carries on both exempt and taxable businesses, may transfer the wholly exempt part of his business as a going concern. However, we know that the TOGC legislation provides that if the seller is VAT registered the buyer must also be VAT registered prior to the transfer date, or must become liable to register for VAT as a result of the transfer (i.e the buyer must be a taxable person).
As such, if the buyer does not carry on some other, taxable, business, it will not be a taxable person. Therefore, this condition cannot be satisfied, and the TOGC fails.
So what next?
Assuming the transfer is not a TOGC, the transfer would be the sale of the assets, and will be a supply for VAT purposes. One must then look at each of the assets being transferred. Where the assets are goods on which no input tax was deductible (because they were directly attributed to a wholly exempt activity) their supply is exempt. However, this rule does not apply to services. Therefore, if any goodwill is changing hands and any charge is being made for goodwill there will be a standard rated supply of that goodwill and VAT must be charged.
If you or your clients have any VAT issues, or generally need any tax advice, on a proposed transaction then please do not hesitate to let us know.