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VAT on business disposals

September 2008

In this article we are alerting business owners, who may be contemplating the sale of their business, of a number of key issues that will affect how they treat the disposal for VAT purposes. Three topics are considered:

  • a sale as a going concern
  • a sale of business assets
  • property considerations
  • Sale as a going concern.

    The basic rule is that no VAT output tax is due on the proceeds received from the sale of a business which is sold as a going concern. The key point is that the buyer must be acquiring the actual business and intend to carry on the same type of business as the vendor. To qualify a sale as a going concern be careful to avoid the following situations which would not qualify:

    • Ensure there are no consecutive transfers of the same business, i.e. from Company A to Company B and immediately sold on to Company C.
    • There should be no significant gap in trading when the new owners take over the business.
    • The business must be a going concern at the time of the transfer.

    Sale of business assets.

    On the other hand if you are made an offer you can't refuse for your business premises, and you decide to sell off your remaining stock and dispose separately of your fixtures and fittings; you would not be selling a continuing business but merely selling the business assets. Under these circumstances you should add VAT output tax to the sales of stock and fixtures and fittings. The VAT consequences of selling business premises are considered below.

    Property considerations - Option to tax.

    When you purchased your business property you may have made, or taken on, an option to tax election with HMRC. When you sell the property on the face of it you are required to add on VAT at the standard rate.

    If the purchaser of the property also makes an election to tax his or her interest in the same property, before they take ownership, then the proceeds of the sale relevant to the property will be outside the scope of VAT. Additionally the purchaser must also confirm in writing to you, the seller, that they will not disapply the option to tax election.

    If the purchaser is buying the property to convert it from business use to residential use, the option to tax election is overridden. This means that the sale of the building then becomes an exempt supply, no VAT charged, even though an option to tax election is in place.

Hilton Sharp & Clarke