Our client is in the process of selling part of his business which comprises exempt residential lets and taxable garden maintenance, design and landscaping services. It has become too much for him so he is selling part of the taxable side of the business – the garden maintenance side – and will be incurring fees for the legal and accountancy services relating to the sale.
As he is partly exempt, professional fees are usually put in his residual input tax, but as a transfer of a going concern is not a supply, how is the input tax recovery treated?
Where certain conditions are met the sale of a business is treated as the transfer of a going concern (TOGC) and correctly this is not a supply for VAT purposes. To bring others up to speed who might not be quite so familiar with the rules, the conditions to treat the transfer of a business as a TOGC are set out in detail in Notice 700/9 but are summarised below.
Briefly, they are that:
• The assets being transferred must put the transferee in possession of a business capable of being operated;
• The business, or part of a business, must be a going concern at the time of the transfer;
• The transferee must intend to use the assets to operate the same kind of business;
• There must not be consecutive transfers of the business;
• If the transferee is a taxable person the transferee must be taxable or become one as a result of the transfer, and
• There must be no significant break in trading.
Although the transfer of a business as a going concern is not a supply for VAT purposes, the costs are treated as a general overhead of the business; or if only part of a business is sold, a general overhead of that part of the business. Input tax may be recovered depending on the nature of the business being transferred. If the part of the business being sold is fully taxable, then input tax on the selling costs can be recovered in full. Conversely, if the exempt side of the business were sold the input tax would be irrecoverable (subject to the de minimis rules), and if a partly exempt business were sold the input tax would be residual and recoverable in accordance with the seller’s partial exemption method.
As our client is selling a fully taxable part of his business, he should treat the VAT incurred in respect of the sale as taxable input tax and recoverable. [1]
[1] Reproduced from Croner Taxwise