Andrew Needham looks at the different ways of selling a business and the VAT consequences.
Selling a business can be a complex matter; one point to consider is the VAT consequences of the sale. When a business is sold it can be either by a share sale if it is a company, or the sale of the trade and assets of all or part of the business.
The VAT consequences of the two alternative methods of sale are very different and can affect the ability to recover VAT on the associated professional costs.
Selling the shares in a business can be time consuming and expensive business. There are a number of consequences that business owners should be aware of.
The sale of existing shares is an exempt supply; that can have consequences on the ability to recover VAT on the associated costs. If a business makes an exempt supply it cannot recover the VAT on directly attributable costs if it exceeds both £625 per month on average (i.e. £7,500 over the partial exemption year) and it is more than half the total input tax incurred in that period.
As this would be a one-off transaction, any irrecoverable input tax recovery would only apply to the directly attributable costs and not the general overheads of the business.
Another point to consider is that in many cases the shares in the company are owned by an individual so the supplies of professional services are to the individual not the company; thus it may not be possible to recover any VAT at all.
If business owners are considering a share sale, they will therefore need to factor in the irrecoverable VAT on professional fees.
If the business owners engage a professional firm specialising in corporate finance transactions to handle the share sale and they are involved in finding and negotiating with potential buyers they should exempt their services to them so that they don’t incur any VAT in the first place.
Sale of trade and assets
Under normal circumstances, the sale of business assets would be subject to standard rated VAT. However, when selling the entire business, or part of the business that is capable of separate operation (e.g. two shops of a five shop chain) it can be treated as a ‘transfer of a going concern’ (TOGC), which is considered not to be a supply of goods or services for VAT purposes, and no VAT is chargeable.
If TOGC status applies, no VAT is charged on the transfer of the assets. The conditions for a TOGC to apply for VAT purposes are:
- the entire business is transferred as a going concern; or
- if only a part of a business is being sold, that part must be capable of separate operation; and
- the purchaser must use the assets in the same kind of business, which may be as part of an existing business; and
- the purchaser should already be VAT registered or become VAT registered as a result of acquiring the business.
If the conditions for TOGC are not met and the business is VAT registered, VAT must be charged on the sale of each of the assets.
Even though a TOGC is not considered to be a supply of goods or services, any VAT attributable to the TOGC is considered to be a general overhead of the business and can be recovered in full if the business does not make any exempt supplies.
When selling a business remember that if it is structured as a share sale it may not be possible to recover any VAT on the sale costs, but you can if it is a sale of the trade and assets.