On the face of it, buying the trade and assets of a business without VAT all seems very simple. However, there are a number of VAT traps for the buyer. How do you avoid the pitfalls and make the right choices?
In certain circumstances, the sale of a business or part of a business is not treated as a supply for VAT purposes. The sales affected are those where a business is sold as a going concern (‘transfer of going concern’ or TOGC) or where the sale is of part of a business that it is capable of separate operation.
If the assets transferred constitute:
- An entire business transferred as a going concern; or
- A part of the business capable of separate operation; and
- The purchaser uses the assets in the same kind of business; and
- The purchaser registers for VAT, if not already registered.
Then the transaction is outside the scope of VAT. Simple? Not quite…
Avoiding the VAT Traps
Let’s take an example where Mr Oliver decides to buy an Italian restaurant. The previous owner is registered for VAT and decides that the sale qualifies as a TOGC.
VAT Trap 1.
The business turned over £250,000 last year, so when should you register for VAT? Many fall into the pitfall of thinking that they can trade the business until it reaches the VAT registration threshold of £70,000. They think that they can either undercut their competitors for a time, or keep the prices the same and increase the profits. Unfortunately this would be a mistake. The law says that with a TOGC you should look at the previous 12 months turnover, including the period when the business was operated by the previous owner.
You would therefore have to register for VAT immediately after you took over the business or else, when HMRC visits, you will have to pay the VAT on the takings plus interest and a penalty.
VAT Trap 2.
When you buy a business as a TOGC you have the choice of continuing to use the existing VAT number or re-registering for VAT with a new VAT number. Many business can’t be bothered with all the paperwork and having the stationary reprinted so they keep the existing VAT number. This could be a mistake.
For example, three months after opening Mr Oliver is visited by HMRC. As Mr Oliver has kept the existing VAT number HMRC looks at the records for the past four years. He finds that the previous owner had his hand in the till and has suppressed 20% of his takings. HMRC writes out a bill for £26,250 plus interest and gives it to Mr Oliver because along with the VAT number went all the VAT liabilities of the business.
Practical Tip:
Unless you have a very good reason for keeping the existing VAT number, always re-register a business when you buy it as a TOGC so that you start with a clean sheet and do not inherit any of the liabilities of the previous owner.
By Andrew Needham
