VAT & TOGC – clarifying the facts

A recent query concerning an exempt TOGC reminded me that there are a number of misunderstandings arounds TOGC and this is an area where a little knowledge can definitely be a dangerous thing, so I thought an article clarifying some of the facts might be helpful.

This article is not a comprehensive guide to TOGCs. Please use it as a refresher and to point you to taking specific advice where relevant.

TOGC is the transfer of a business as a going concern and under Article 5 of the VAT (Special Provisions) Order 1995 a TOGC is not a supply for VAT purposes. That is not to be confused with the general term ‘the transfer of a going concern’ as referred to in Section 49 of the VAT Act which creates a liability on a buyer to register for VAT if the Seller of the business is registered and over the threshold.

For the remainder of this article the reference to TOGC is to the Article 5 version.

First to refresh the basics:

The benefits of TOGC are:

Removing the need to separately value the component parts of a transfer where they have different VAT liabilities;
Reducing SDLT which is otherwise chargeable on the gross (VAT inclusive) value of a property transfer;
Reducing cashflow disadvantage
Removing irrecoverable VAT cost where the buyer cannot recover VAT but can achieve TOGC treatment.
Not creating a new Capital Goods Scheme item.

There are 5 basic conditions of TOGC treatment:

The supply is of the assets of the seller’s business;
It is a going concern;
If the transfer is only of part of a business, it is capable of separate operation;
The buyer will use the assets to carry on the same kind of business as the seller;
If the seller is a taxable person, the buyer is either already a taxable person or will become a taxable person by virtue of the transfer.

If the transfer includes property, the additional conditions are:

If the sale would otherwise be standard rated, the buyer opts to tax the property and notifies HMRC within the specified time limits;
The buyer provides the Seller with notification that the option to tax will not be disapplied under the anti-avoidance rules.

Now for some myth/misunderstanding busting:

Although the inclusion of property in a TOGC creates additional hurdles, you can have a TOGC where there is no property and it is still important to assess whether the transfer constitutes a going concern and the necessary conditions are met.
Where a transfer includes property it may be the transfer of a business where the property is one of the assets, where a property is held for letting (a property rental business) or where a property development is in progress.
Although predominantly relevant where a transfer would otherwise be standard rated, you can have an exempt TOGC. The benefit of an exempt TOGC compared to an exempt sale is that the TOGC is ignored for the purpose of the partial exemption calculation with any VAT relating to the TOGC being treated as residual. Assuming that the business makes other taxable supplies this means greater input tax recovery.
In order to achieve an exempt TOGC which is of benefit to the VAT registered seller, the buyer must also be a taxable person. Where the buyer is a newco or a wholly exempt business this will not be met and creates a VAT loss for the seller.
Where a property is split on sale e.g. a residential part to one buyer and commercial to another, one part may qualify as TOGC and the other part not.
If the taxable turnover of the part of the business being transferred is over the VAT threshold, the buyer does not need to already be registered for TOGC to apply. However if the property is opted to tax the buyer does need to have opted to tax and so also needs to have applied to be registered.
Conversely, if the taxable turnover of the part of the business being transferred is under the VAT threshold, the buyer does need to already be registered for TOGC to apply. Just having applied to register is insufficient.
TOGCs involving non- UK established buyers require very careful attention because they have different registration requirements dependent on whether the transfer is of a property as part of a business or a property rental business.
Remaining Capital Goods Scheme (CGS) intervals transfer from seller to buyer on a TOGC. This means that a change in the extent of taxable use by the buyer compared to the seller within the remaining CGS period will create either additional VAT recovery or VAT repayable to HMRC relating to VAT incurred by the seller.

Relying on the CPSE response regarding the CGS is very dangerous as the implications are often not appreciated by the person completing the CPSE. It can be just as important for the seller to appreciate this as the buyer as additional VAT recovery by the buyer should be factored into the sale price.

This is especially relevant when selling buildings previously used by charities.

I hope that the above clears up some grey areas and provides some food for thought. As I said at the top this is not a comprehensive guide to TOGC. Give me a shout if I can help with any specific queries.

Debra Dougal, Haslers - debra.dougal@haslers.com - 020 8418 3333

May 2022