Buying & Selling a BusinessVAT Considerations

When buying or selling a business, VAT can complicate matters. It's not always easy to understand, but it's crucial to get it right.

VAT options when buying or selling a business

VAT is an essential consideration for both the buyer and seller when a business is transferred. The risk of incorrect VAT treatment can be costly for both buyer and seller.

There are two options when buying a business:

  • Purchase of shares in a limited company
  • Purchase of the assets of the business

The VAT treatment differs for each option, with various VAT risks. Here, we will share the key considerations relating to VAT when buying or selling a business, but we strongly recommend speaking to an expert for advice, too.

VAT and Purchase of Shares

The sale of existing shares in a business is exempt from VAT as it falls under the financial services exemption.

The buyer will not be charged VAT but should ensure that any agreement to purchase the shares includes confirmation that the buyer will be issued with a tax invoice if, later, HMRC rules that the transaction did not meet the criteria to be treated as an exempt supply.

As the selling of shares is an exempt supply, this affects the seller’s ability to reclaim VAT in connection with the professional costs incurred in selling the business. Where the shares are owned by an individual, recovery of VAT charged on such expenses is not possible.

Where the seller is a company (such as a holding company), the VAT is recoverable subject to normal partial exemption rules. Still, care has to be taken to ensure that the costs incurred relate to or are closely linked to an economic business activity.

The sale of shares in a company requires careful planning to ensure that neither the buyer nor seller is disadvantaged from a VAT perspective.

VAT and Purchase of Assets

The sale of business assets would generally be subject to VAT at the standard rate. However, when the whole or part of a business is sold to a buyer who intends to use the assets to continue in the same trade, the company can be transferred as a going concern (TOGC).

A TOGC is neither a supply of goods nor services and is, therefore, outside the scope of VAT. The seller does not charge VAT on the transfer, and the buyer does not have any VAT to reclaim.

Do you qualify for TOGC treatment?

Certain conditions must be met to qualify for TOGC (Transfer of a going concern) treatment. These include, but are not limited to, requirements in the following areas:

  • The way that the buyer uses the assets.
  • VAT registration status of the buyer.
  • The operational status and trading history of the buyer.

Additional conditions must be met when land and property are being sold as part of the TOGC, including the buyer’s requirement to tax the land/property if the seller has an option in place.

Treating the sale of a business as a TOGC for VAT purposes is not optional. If the seller charges VAT because the buyer will reclaim the VAT on their VAT return, HMRC can disallow the buyer’s VAT recovery as VAT was incorrectly charged.

How the Shorts team can help

Understanding the VAT implications and ensuring the VAT treatment is correct when buying or selling a business is essential. Getting it wrong can cause difficulties and potential penalties. To assist you with this process, we have a specialist VAT advisory department with particular expertise in the VAT treatment of business transfers, both in the UK and internationally.

Whatever your VAT query involves, get in touch with our team of specialists today.

Are you looking for information on how to sell a business in the UK? Read our in-depth guide.

DO YOU HAVE A VAT QUERY? TELL US ABOUT IT BELOW AND WE'LL BE HAPPY TO HELP

Shorts has more expert tax advisers than any independent firm in our region. Whatever your VAT query, our team is here to help.

The Shorts VAT Team