When and how to account for VAT when you transfer a business as a going concern (TOGC).
This notice explains whether the transfer of a business should be treated as a ‘transfer of a business as a going concern’ (TOGC) for VAT purposes. It also explains the VAT treatment in each circumstance. It will help you ensure that the correct amount of VAT, when chargeable, is properly accounted for and paid.
You should read this notice if you are selling or otherwise transferring a business, or part of a business. It will also be useful if you’re acquiring a business. In certain circumstances special TOGC rules apply and the sale will not be treated as a supply for VAT purposes, so no VAT should be charged. To qualify as a TOGC, the assets sold must be both of the following:
- capable of forming a separate business in their own right
- used by the purchaser to carry on the same kind of business as that operated by the seller
You can find further information about the application of the TOGC rules in VAT Transfer of a going concern.
1.1 Business and going concern
In this notice, the word ‘business’ means any continuing activity which is mainly concerned with making supplies to other persons for a consideration. The activity must have a degree of frequency and scale and be continued over a period of time. Isolated transactions are not normally business for VAT purposes.
‘Going concern’ has the meaning that, at the point in time to which the description applies, the business is both of the following:
- live or operating
- has all parts and features necessary to keep it in operation, as distinct from its being only an inert aggregation of assets, but see paragraph 2.3.1
1.2 Examples in this notice
This notice provides examples in order to illustrate a point or an area of potential confusion rather than an exhaustive list of examples. Many of the examples involve property, premises or property rental business, because of the complexities in this area.
It’s important that each transfer is considered individually for TOGC purposes on the basis of its facts and circumstances, so a ‘one size fits all’ approach is not appropriate.
1.3 Force of law
Section 10 contains an example of the VAT 68 form which carries force of law under the VAT Regulations 1995, Regulation 6(d).
1.4 TOGC for VAT purposes
Normally the sale of the assets of a VAT-registered business, or a business required to be VAT registered, will be subject to VAT at the appropriate rate. But if you sell assets as part of a business which is a going concern then, subject to certain conditions, no supply takes place for VAT purposes and no VAT is chargeable.
It’s important to be aware that the TOGC rules are mandatory and you should establish from the outset whether the sale is a TOGC. It does not matter if your sale of assets would otherwise be treated as exempt or zero-rated as there can still be a TOGC if the conditions are met.
For there to be a TOGC for VAT purposes, all of the following must apply:
- the assets, such as stock-in-trade, machinery, goodwill, premises, and fixtures and fittings, must be sold as part of the TOGC
- the buyer must intend to use the assets in carrying on the same kind of business as the seller - this does not need to be identical to that of the seller, but the buyer must be in possession of a business rather than simply a set of assets
- where the seller is a taxable person, the buyer must be a taxable person already or become one as the result of the transfer
- in respect of land or buildings which would be standard-rated if it were supplied, the buyer must notify HMRC that they have opted to tax the land by the relevant date, and must notify the seller that their option has not been disapplied by the same date
- where only part of the business is sold it must be capable of operating separately
- there must not be a series of immediately consecutive transfers of the business
1.5 When it is not a TOGC
There are sales which fail to meet the conditions in paragraph 1.4. These include, but are not limited to:
- the buyer does not:
- continue the business and absorbs the assets itself
- intend to use the assets to continue the same kind of business as the seller
- the buyer is not registered for VAT or required to register as a result of the transfer
- there is no supply made, which could include situations such as changes in the constitution of a partnership
- there has been no transfer of assets so there is nothing to which the TOGC provisions can apply
- instances where a limited company is passed from one person to another via the transfer of shares, but the assets still belong to the limited company - there is no change in the ownership of the assets so no supplies to which the TOGC provisions could apply
- where a VAT-registered farmer transfers his business as a going concern to a farmer who is certified under the Agricultural Flat Rate Scheme there can be no TOGC for VAT as the buyer is not registered or registerable for VAT
If you’re registered for VAT but you have not yet made taxable supplies, the transfer of your business might not be the transfer of a ‘going concern’. But, where enough preparatory work has been undertaken prior to making taxable supplies there will be a business capable of being transferred as a going concern.
Section 6 gives more details on transfers of property, some of which are transfers of businesses as a going concern.
1.6 TOGC rules
The TOGC provisions are intended to simplify accounting for VAT when a business changes hands. They have the following main purposes, to:
- relieve the buyer of a business from the burden of funding any VAT on the purchase, helping businesses by improving their cash flow and avoiding the need to separately value assets which may be liable at different rates or are exempt and which have been sold as a whole
- protect government revenue by removing a charge to tax and entitlement to input tax where the output tax may not be paid to HMRC, for example, where a business charges tax, which is claimed as input tax by the new business but never declared or paid by the old business
2. How to apply the TOGC rules
This section deals with the special rules which apply to a transfer of a business so that the transfer of some, or all of the assets, should be treated as a TOGC and not as a taxable supply.
2.1 Why it is important to get the tax treatment right
The TOGC rules are compulsory. You cannot choose to ‘opt out’. So, it’s very important that you establish from the outset whether the business is being sold as a TOGC. Incorrect treatment could result in corrective action by HMRC which may attract a penalty and interest.
If all the conditions in paragraphs 1.4 and 2.2 are met, the TOGC rules apply and VAT must not be charged or accounted for on the assets transferred (except, in certain circumstances) on the premises, for example, land or property used in the business. Details of the circumstances in which you must charge VAT on the premises are set out in paragraph 2.3.
If VAT is charged when it should not have been the:
- buyer will not be able to reclaim this amount as input tax, because there was no taxable supply
- seller will have to cancel any tax invoice issued and provide the new owner with a refund of the VAT charged - normally this will be by issue of a credit note or document giving similar effect
2.2 Conditions to treat a transfer as a TOGC
If all conditions listed in this section and paragraph 1.4 are met, the transfer of the assets of the business is a TOGC and you, as the seller, must not charge VAT. Paragraph 2.4 explains whether you need to charge tax on the transfer of premises.
2.2.1 Business activities
The effect of the transfer must be to put the new owner in possession of a business which can be operated as such. The term ‘business’ means a business activity recognised as such in VAT law.
For example, some of the activities of charities or local authorities are not considered to be business (see paragraph 4.6 of the VAT guide (VAT Notice 700). A sale of ‘capital assets’ is not in itself a TOGC. But, if the effect of the sale is to put the buyer in possession of a business, it is a TOGC even if the assets are transferred on different dates.
The business, or part business, must be a ‘going concern’ at the time of the transfer. It can still be a ‘going concern’ even though it is unprofitable, or is trading under the control of a liquidator or administrative receiver, or a trustee in bankruptcy, or an administrator appointed under the Insolvency Act 1986.
2.2.2 Use of assets - same kind of business
The assets you transfer must be intended for use by the new owner to carry on the same kind of business. It is the continuation of an economic activity that is important, not necessarily that it is identical to that of the seller, see paragraph 7.2.
If the buyer intends in due course to carry on a different kind of business using the assets purchased, the sale may still be a TOGC if the buyer intends to continue the old business initially.
The test is whether the buyer intends to carry on the business they have bought. This test does not lend itself to a set time-span, because ‘continuation of a business’ can vary on a case by case basis. There must be an intention of using the assets rather than just disposing of them.
See section 7 for more information on what counts as the same kind of business.
2.2.3 Consecutive transfers of a business
There must not be a series of immediately consecutive transfers of the business. Where A sells its assets to B who immediately sells those assets on to C, because B has not carried on the business the TOGC provisions do not apply to any of the transactions. This means that the sales take their normal VAT liability (taxable or exempt).
Such immediate transfers often occur in property transactions where A contracts to sell property to B, and B ‘sub-sells’ the property to C with both contracts being completed by a single transfer from A to C.
2.2.4 VAT registration
Where the seller of the business or part of the business is registered for VAT, the buyer must be one of the following:
- registered for VAT
- at the date of the transfer be required to be registered for VAT because all of the conditions for compulsory registration are met
- accepted for voluntary registration and the voluntary registration must be in place at the time that the transaction occurs, it is not enough to apply afterwards for backdated registration
This condition is not met if the buyer is not registered and is not required to be registered for VAT. This could be because either:
- at the date the transfer takes place, the buyer does not expect the value of their taxable supplies in the next 12 months to be above the registration limit, for example, the buyer intends to reduce trading by introducing shorter working hours
- the seller was not required to be registered but was registered voluntarily at the date of the transfer - the buyer is not required to register because the value of the seller’s taxable supplies in the 12-month period then ended is not above the registration limit
In such circumstances, unless the buyer has been accepted for voluntary registration, the conditions for the transfer to be treated as a TOGC are not met and the sale takes its normal liability.
Where only part of the business is being transferred, the buyer must look at the turnover of this part to determine whether they must be registered. Further details about registration can be found in Notice 700/1: should I be registered for VAT?.
You can find more details on registration limits.
You should allow time for registration applications to be processed, as failure to do so may result in the conditions for TOGC not being met.
2.2.5 TOGC where the seller is not registered for VAT
There can be a TOGC where the seller is not registered for VAT. For example, because the seller is trading below the registration limit. The sale of a non VAT-registered business which includes trading stock, the value of which might otherwise take the trader over the registration limit, will not do so because it can be treated as a TOGC and therefore not a supply.
2.2.6 Buyer not established in the UK
A TOGC can still occur if the buyer is a non-established taxable person. This is any person not normally resident in the UK, who does not have a UK establishment and, in the case of a company, is not incorporated in the UK. There are different rules for determining whether a non-established taxable person is liable to register for VAT. These are set out in Notice 700/1: should I be registered for VAT?.
2.2.7 No significant break in trading
There must be no significant break in the normal trading pattern before or immediately after the transfer. The break in trade needs to be considered in the context of the type of business concerned and might vary between different types of trade or activity. HMRC does not consider that where a ‘seasonal’ business has closed for the ‘off-season’ as normal at the time of sale, that there has necessarily been a break in trade.
In addition, a short period of closure that does not significantly disrupt the existing trading pattern, for example, for redecoration, will not prevent the business from being transferred as a TOGC.
2.2.8 Transfer of part of your business
If you transfer only part of your business, that part must be able to operate alone. It does not matter whether it will operate separately from any other businesses the buyer carries on. An ‘in-house’ function is not a business for TOGC condition purposes when it only operates internally. The assets of the part of the business you transfer must have been used to make supplies, they must not merely be used for the overheads of your business (see also paragraph 7.2 and section 4 on VAT groups).
2.2.9 Transfers involving land and property
If the transfer of the land or property would normally be a taxable supply, both the seller and the buyer may need to meet certain conditions for it to be included as part of the TOGC. This is explained in more detail at paragraph 2.3.
2.3 Whether VAT should be charged when land or buildings are transferred as part of a TOGC
A TOGC will often involve the transfer of land and buildings. There are extra rules to determine whether VAT should be charged on the transfer of land and buildings - even if the rest of the transfer does qualify for TOGC treatment.
If all the conditions in paragraph 2.2 are met, and the buyer has complied with the following requirements, the transfer of land and buildings can be part of a TOGC and therefore not subject to VAT. The seller:
- will have opted to tax the land or buildings being transferred and the option is not disapplied in relation to the transfer
- transfers the freehold of a new building (under 3 years old) and the supply, but for the TOGC, would be subject to the standard rate of VAT
But the buyer must also have:
- opted to tax (see paragraph 2.3.1)
- notified the seller that their option to tax will not be disapplied under the anti-avoidance provision set out in VATA 1994, Schedule 10, paragraph 12 in respect of supplies they intend to make of the land or building
2.3.1 Responsibility for applying correct treatment - option to tax by the buyer
The seller is responsible for applying the correct VAT treatment and may be required to support their decision. If the transaction is to be treated as a TOGC the seller must be satisfied that the buyer’s option to tax is in place by the relevant date. They may therefore ask the buyer for evidence of this, such as a copy of the notification letter. The seller must have the buyer’s notification of the non-disapplication of the option to tax and may find it prudent to obtain this in writing.
If the seller transfers land or buildings on which there is no option to tax, and the supply would not be otherwise standard-rated, the buyer is not required to opt to tax and there’s no need to notify that the option has not been disapplied. In these circumstances, namely if the supply is zero-rated or exempt, the transfer of the land or buildings can be included in the TOGC.
2.3.2 Option to tax
The option to tax by the buyer, must be notified to HMRC in writing no later than the relevant date and must apply from that time. You should note that the relevant date is the time of the supply. For VAT purposes the time of supply is normally the date of the transfer, but will also include receipt of a deposit that may otherwise have created a tax point. A tax point is not created by the receipt of a deposit by a third party acting as an independent stakeholder (as opposed to an agent of the seller) until the money is released to the vendor.
Further information on tax points can be found in the VAT guide (VAT Notice 700).
Where the written notification of the option to tax is sent to HMRC by mail, the notification must be properly addressed, pre-paid and posted on or before the relevant date.
Opting to tax land and buildings (VAT Notice 742A) fully explains the option to tax.
2.3.3 Disapplication of the buyer’s option to tax - the anti-avoidance measure
An option to tax can be disapplied as a result of an anti-avoidance measure. Where an option is disapplied this means it will cease to have effect in respect of certain supplies. The anti-avoidance measure only has effect where land and buildings are occupied for something other than fully taxable business purposes and where the land or building is a capital item for the purposes of Capital Goods Scheme (see Partial exemption (VAT Notice 706) and Capital Goods Scheme (VAT Notice 706/2)).
The measure is fully explained in Opting to tax land and buildings (VAT Notice 742A).
Unless the option to tax is otherwise disapplied, freehold transfers of new buildings and civil engineering works (under 3 years old), and land and buildings on which the seller has exercised an option to tax, can only be included within a TOGC where the buyer:
- has an option to tax that has been made and notified by the relevant date
- makes a declaration to the seller that their option will not be disapplied by the anti-avoidance provisions Opting to tax land and buildings (VAT Notice 742A)
Where the buyer fails to do either of these, the transfer of the property will fall outside of the TOGC provisions and the supply will be subject to VAT. But the transfer of other business assets may still qualify to be treated as a TOGC.
The following tables will help you decide whether land and buildings can be included in the transfer of assets as part of a TOGC.
Commercial land or building, ordinarily exempt
|Has seller opted to tax (building over 3 years old)?||Has the buyer opted to tax?||Will the buyer’s option to tax be disapplied?||TOGC provisions met?|
New building (less than 3 years old), ordinarily standard-rated
|Has seller opted to tax?||Has the buyer opted to tax?||Will the buyer’s option to tax be disapplied?||TOGC provisions met?|
2.4 When a ‘property rental business’ is transferred
Section 6 gives examples of circumstances concerning the transfer of land or property where there may be a transfer of a business of ‘property rental’ as a ‘going concern’. In those cases where there has been such a transfer, the conditions of paragraphs 2.2 and 2.3 must still be met for there to be a TOGC and for the supply of assets to be ignored for VAT purposes.
An optional statement of practice is available where a property rental business is being transferred to a nominee acquiring title for a named beneficial owner (see section 8).
Where only the beneficial ownership of a property rental business is transferred, and the legal title is retained by the seller, there may be a TOGC. If the seller’s ownership is reduced to being no more than that of a bare trustee, it’s accepted that the property, together with its lettings may be transferred as a ‘going concern’.
Where there’s a transfer of a beneficial interest from A to B to C on the same day this is seen as a series of consecutive transfers, even where the legal title is transferred directly from A to C. The condition as per paragraph 2.2.3 is not met and TOGC does not apply to any of the transactions.
When a tenanted building is sold or a lease is assigned mid-way through a rent period, an adjustment is normally made to the consideration at the point of completion. These adjustments may be for rent collected, or for water and power paid for in advance prior to the sale or assignment. They are not consideration for any supply and are outside the scope of VAT. For VAT purposes the consideration for the sale of the building or the assignment of the lease is the full value of the supply before any adjustment is made (see Land and property (VAT Notice 742)).
2.5 Deduction of VAT on expenses incurred on the transfer
Although there is no supply for VAT purposes where there is a TOGC, this does not prevent the deduction, subject to the usual rules, of input tax on related expenses (for example, solicitors’ fees and estate agents’ costs). There is a distinction between the extent to which the seller and the buyer can deduct such input tax.
If the buyer acquires assets by way of a TOGC and the assets are to be used exclusively to make taxable supplies, the VAT incurred on the cost of acquiring those assets should be attributed to those taxable supplies and can be recovered in full.
If the assets of the acquired business are to be used exclusively to make exempt supplies, none of the input tax on the cost of acquiring those assets can be recovered.
But, if the assets are to be used in making both taxable and exempt supplies, any input tax incurred is residual input tax and must be apportioned in accordance with the buyer’s VAT partial exemption method.
See Partial exemption (VAT Notice 706) for further guidance.
The sale of the business as a TOGC is not a supply and the input tax incurred on the cost of selling the business cannot be attributed to it by the seller. These costs are, therefore, treated as a general business overhead of that part of the business being transferred. Where that part of the business makes:
- only taxable supplies, the input tax is fully recoverable
- only exempt supplies, the input tax is wholly non-recoverable
- both taxable and exempt supplies, the input tax is residual and recoverable in accordance with the partial exemption method in place
In instances at paragraphs 2.5.1 or 2.5.2, where the existing partial exemption method fails to achieve a fair and reasonable result, then we would be prepared to approve the use of another method, as long as that method provides for a fair and reasonable recovery of input tax. See Partial exemption (VAT Notice 706) for further guidance.
3. Rules following a TOGC
This section explains the rules following a TOGC in relation to a number of different areas that may be affected by TOGC.
3.1 Capital Goods Scheme considerations
The scheme applies where the value of taxable supplies, other than zero-rated ones, received in connection with the acquisition or creation of any of the items listed is £250,000 or more. In the case of computers and computer equipment the scheme only applies where the value of the supply is £50,000 or more. These items are:
- certain property expenditure of £250,000 or more
- aircraft, ships, boats and other vessels with a VAT-exclusive value of £50,000 or more
- a computer or an item of computer equipment
- related self supplies if relevant
More information is available in paragraphs 8.3, 9.2, 9.3 and 10.3 of the Capital Goods Scheme (VAT Notice 706/2) guide.
3.2 De-registration and goods still owned by the original business
If you transfer your business as a TOGC and are not going to continue trading in another capacity you will need to cancel your VAT registration using form VAT7.
But, if you’re cancelling your registration and have any goods which you’ve claimed input tax on and are not transferring with the business, you will normally have to account for VAT on these assets. Paragraphs 2.3 and 2.4 of VAT Notice 700/11: cancelling your registration tell you more about this.
You should be aware that if you fail to notify HMRC of any changes affecting your registration details within 30 days of them occurring you may become liable to a financial penalty.
If, when you cancel your registration, you have a capital item covered by the scheme and which is still within its adjustment period you will need to make a final adjustment. Capital Goods Scheme (VAT Notice 706/2) tells you more about this.
3.3 Transfer of the previous owner’s registration number
In certain circumstances the buyer can apply to keep the seller’s VAT registration number. As part of that application both the seller and the buyer must agree to the consequences of reallocation.
The transfer of a VAT registration number can be requested using HMRC online services or by completing form VAT68.
The consequences of transferring a VAT registration number are legally binding on both parties and include the transfer of any VAT liability to the buyer. The buyer’s liable for any outstanding VAT from the seller’s registration including VAT on stocks and assets kept by the seller. But the seller is no longer entitled to any repayments of VAT or unclaimed input tax whether these amounts refer to periods before or after the transfer.
The consequences also include the transfer of entitlement to unclaimed VAT bad debt relief on debts incurred by the seller of the business. But, the buyer also takes the requirement to repay input tax claimed by the seller on supplies he received and which have subsequently become the subject of a bad debt relief claim made by the supplier or if the supplies remain unpaid after 6 months.
Further details about bad debt relief can be found in Relief from VAT on bad debts (VAT Notice 700/18) .
3.4 Business records
How business records are treated will depend on whether the buyer has taken on the seller’s VAT registration number.
The seller of a business (or part business) sold as a TOGC retains the business records, unless the VAT registration number is also transferred. But, the seller must make available to the buyer the information necessary for the buyer to comply with their duties under the VAT Act.
If the buyer is unable to obtain this information from the seller, then HMRC can disclose to the buyer the information HMRC holds that is necessary for the buyer to comply with duties under the VAT Act. HMRC will advise the seller of its intention to disclose information to the buyer thereby providing the opportunity to identify any confidentiality issues.
You can find more information in paragraph 2.8 of Record keeping (VAT Notice 700/21).
3.5 Giving away goods or services owned by the previous business
The buyer may be liable for VAT on the deemed supply of assets taken into private use or disposed of as gifts, where the assets were transferred to them and the seller originally reclaimed input tax on the purchase of those assets - see section 9 of the VAT guide (Notice 700).
Under the normal rules, when a business gives away goods or services on which input tax has been recovered, VAT is due on that disposal. Business gifts costing £50 or less or free samples are exceptions to this rule. Where goods and services are transferred as part of a TOGC, and a previous business has had entitlement to input tax on those supplies, output tax is still due on any subsequent free supply of those goods or services by the buyer.
3.6 Intrastat rules
VAT-registered businesses are required to complete statistical Supplementary Declarations if their intra-EC trade exceeds annually set value thresholds for either dispatches (exports) or acquisitions (imports) of goods.
When the VAT registration of a trader responsible for providing Supplementary Declarations is amended as a result of a change of ownership, name, address, legal status or similar change that does not significantly affect their intra-Community operations, then the new VAT-registered trader keeps the legal responsibilities and obligations to continue to provide Supplementary Declarations.
3.7 TOGC interaction with customs authorisations
It’s important to note that the treatment of a transfer of a business as a TOGC for VAT purposes may well give rise to registration issues for:
- customs authorisations
- excise and inland customs approvals
The transfer of the VAT registration number by form VAT68 does not mean that registration for other duties or taxes has similarly been transferred. Generally customs or excise registrations or approvals will need to be applied for again. If you are a seller or a buyer of a business and are subject to these regimes you are advised to contact your issuing authority within HMRC or contact our helpline for advice on the effect.
4 VAT groups and TOGCs
4.1 Transfers of businesses between members of the same VAT group
The formation of a VAT group creates a single person for VAT purposes and as such any supply by a member of a VAT group is considered to be made by the representative member of the group. Supplies between members of a group are disregarded for the purposes of VAT. But this does not mean that the members of a group are not businesses when they make supplies to each other.
If a business, or part of a business capable of separate operation, is transferred between group members then this can be treated as on-going activity provided that it is used to make supplies outside the group.
4.2 Transfers made to those outside the VAT group
The transfer of a business, or part of a business capable of separate operation, from within a VAT group to a business outside of that group is subject to normal TOGC rules.
4.3 Transfers made to a VAT group
The initial transfer of a business, or part of a business capabale of separate operation, to a company in a VAT group is a TOGC if that company both:
- intends to continue to use the transferred assets to operate the same kind of business
- will provide supplies of that business to other group members, and those other group members use or intend to use them to make supplies outside the group
This is also the case if, after the initial transfer into the group, the business is transferred between group members, provided that ultimately the services that it provides are made to a group member that makes or intends to make services outside the group.
If the buyer uses the assets to make supplies directly outside the VAT group, this would also be a TOGC.
Whether a TOGC has occurred will depend upon the facts of the particular case, but it is important that the assets transferred into a VAT group are used to make supplies outside the group and not merely consumed within the VAT group.
5. Members of a partly exempt VAT group
This section provides information on the requirements for a new owner who’s a member of a partly exempt VAT group acquiring a business as a TOGC.
5.1 General rules for partly exempt VAT groups
If you’re a member of a partly exempt VAT group and you acquire business assets as part of a TOGC, you must treat these assets as being both supplied to the group and supplied by the group. This means a self-supply is triggered.
In practice, the representative member must account for output tax in relation to the supply by the group and recover the input tax incurred in relation to the supply to the group, in accordance with the partial exemption method in operation. But the input tax cannot be attributed to the self-supply itself.
The self-supply will not be triggered in relation to:
- any assets which were assets of the previous owner more than 3 years before the date of the transfer
- goodwill (for example, goodwill, use of a trademark or trading name, the sole right to trade in a particular area, and so on)
- any assets which are zero-rated or exempt (for example zero-rated or exempt freehold or leasehold interests in land)
- items which fall within the Capital Goods Scheme, for further details of items covered by the scheme see paragraph 3.1 and Capital goods scheme (Notice 706/2)
5.2 Value for VAT purposes of the supply made to and by the representative member
The value of the supply by, and to, the representative member is its open market value. If the previous owner is unconnected with your group, this will normally be the consideration you paid for the assets on which tax is due. If VAT is not due on some of the assets, the consideration must be apportioned fairly between the standard-rated assets and other assets. Paragraph 8.1 in the VAT guide (Notice 700) tells you how to do this.
HMRC can reduce the VAT chargeable in relation to the self-supply if you can produce satisfactory evidence to show that the previous owner did not recover all of the input tax incurred on the original purchase. This would include if they were partly exempt or the input tax was ‘blocked’, for example, on the purchase of a car.
In a case where the seller’s partial exemption recovery rate (during the partial exemption tax year in which the assets were purchased) is equal to or less than the buyer’s recovery rate (during the partial exemption tax year in which the assets were acquired) the VAT charge will be reduced to nil, although no tax will be refunded.
If you consider that you have evidence that the tax due should be reduced, you should consult our advice service.
6. Transfer a property business as a TOGC
This section provides guidance on when a property can be transferred as a TOGC. The term ‘freehold’ is used for convenience but they would also apply in instances of long leaseholds and in Scotland the interest of the owner. They reflect that the conditions set out in paragraph 2.3 have been met.
6.1 When a property business can be transferred as a TOGC
You will be making a transfer of a business capable of being treated as a TOGC if you own any of the following:
- the freehold of a property, which you let to a tenant, and sell the freehold with the benefit of the existing lease, a business of property rental is transferred to the buyer - this is a business transferred as a TOGC, even if the property is only partly tenanted
- the lease of a property (which is subject to a sub-lease) and you assign your lease with the benefit of the sub-lease
- a building where there’s a contract to pay rent in the future, but where the tenants are enjoying an initial rent free period, even if the building is sold during the rent free period, you’re carrying on a business of property rental capable of being transferred
- a property and have found a tenant, but not actually entered into a lease agreement when you transfer the freehold to a third party (with the benefit of a contractual agreement for a lease but before the lease has been signed), there is sufficient evidence of intended business activity for there to be a property rental business capable of being transferred
- a number of let freehold properties, and you sell one of them, the sale of this single let or partly let property can be a TOGC of a property rental business
It will also be capable of being a TOGC if you:
- grant a lease of the property, but retain an interest that has a value of no more than 1% of the value of the land or property immediately before the transfer (disregarding any mortgage or charge)
- are a tenant of a building, you have sub-let part of that building, and you surrender your lease to the landlord with the benefit of the subleases, then you are transferring your property rental business because the landlord will become the landlord of the sub-tenants
- are a property developer selling a site as a package (to a single buyer) which is a mixture of let and unlet, finished or unfinished properties, and the sale of the site would otherwise have been standard-rated
- are a business, owning land which you begin to develop with the intention of constructing buildings for sale (and these supplies would be taxable supplies), and you perform work on the land such as widening roads and installing utilities - if a part of this partially developed land is then sold to a property developer who intends to complete the development and sell the newly constructed buildings, this transaction can be part of a TOGC because although you never made taxable supplies, there was the intention to do so
- have a partially-let building which is capable of being a property rental business, providing that the letting constitutes economic activity, but such cases should be considered on their facts - HMRC would not see a TOGC if the letting element of the transaction was so small as to be negligible
- purchase the freehold and leasehold of a property from separate sellers without the interests merging and the lease has not been extinguished, providing you continue to exploit the asset by receiving rent from the tenant
6.2 When a property business cannot be transferred as a TOGC
You will not be making a transfer of a business capable of being treated as a TOGC if you:
- are a property developer who has built a building, and you allow someone to occupy temporarily (without any right to occupy after any proposed sale) or you are ‘actively marketing’ it in search of a tenant, there is no property rental business being carried on
- grant a lease retaining an interest that has a value that is greater than 1% of the value of the property immediately before the transfer (disregarding any mortgage or charge) - where more than one property is transferred at one time, this test should be applied on a property by property basis rather than for the entire portfolio
- sell a property freehold to the existing tenant who leases the whole premises from you, this cannot be a TOGC because you are not transferring your property rental business to the tenant
6.3 Transfer of a number of sites or buildings
HMRC will need to consider the transfer of a number of sites or buildings, where some of the sites or buildings are let, or partially let and some are unlet, on a case by case basis.
We will look at:
- the nature of the sites or building and their use
- whether the assets can be identified as a single business or an identifiable part of a business
- if all the conditions as set out at paragraphs 1.4 and 2.2 are met
If a number of properties are sold together as a single portfolio, this can be a single TOGC, even if not all the properties are let. For example, the sale of a chain of shops or pubs could be a TOGC whereas the sale of a grouping of diverse properties might not.
7. The definition of ‘same kind of business’
7.1 Trading activities after a business is transferred
You must check whether the person buying your assets intends to operate the business in the same way as you. For example, you may choose to insert a warranty about the buyer’s intentions in the sale agreement.
This is because the TOGC rules apply where both the:
- seller is selling the assets of all or part of a business which is being transferred as a going concern
- buyer intends to use these to run the same kind of business
There must be continuing business activity, rather than the mere acquisition of assets with a view to liquidation or instantaneous disposal.
7.2 What will be the same kind of business
It would be seen as the same kind of business if you sold your business to someone who intends to restructure it so that the business activity continues, even though there may be changes to the manner in which the business is run. For example a:
- restaurant specialising in Italian food is sold to a buyer who wants to change the restaurant to a café that sells hot snacks
- buyer takes over the premises, stock and goodwill of a shop that sells hats, but expands the range to cover coats and gloves too
There is no minimum period for how long this business activity should continue after the transfer, but the activity must be real. There should be a discernible business or part of a business that can be operated separately before the transfer and this should be recognisable afterwards.
There must be:
- business activity and not the instantaneous transfer of assets
- more to a business than simply the disposal of that business
7.3 What will be a different type of business
It would not be the same kind of business after you sold it if the buyer fundamentally changed it or did not use it in the same way. This would include the buyer granting franchises to operate trading sites, as opposed to operating the actual trading activity of the franchises themselves.
There would also be no TOGC if the buyer was required to use only your product to support his existing business and without making any supplies of your product to any third parties, such as if you:
- manufacture ink and sold your business to a printer
- make drinks straws and sold your business to a fast food chain
You may have difficulty if you’re a business with more than one trading activity. This would include a brewery that is in business selling beers, wines and spirits to the public in their managed house outlets. But they would also be in business renting properties to tenants (where the tenants are selling to the public). If the brewery was leasing a pub to tenants, and then sold the business to someone who was to run the pub themselves, then it would not be a TOGC. This is because the brewery had a business of renting property and the new owner has a business of running a pub.
8. Property letting business - statement of practice
See paragraph 2.4.
This statement of practice about nominee buyers acquiring legal title is optional and may only be applied by persons transferring an interest in land to a person who’s a nominee for a named beneficial owner. The option is not available if the nominee is acting for an undisclosed beneficial owner.
Where the legal title in land is to be held by a nominee for a named beneficial owner, HMRC will, for the purpose of establishing the transfer of a property letting business as a going concern, consider the named beneficial owner of the land and not the nominee acquiring legal title to be the buyer.
The new optional practice allows a person transferring an interest in land to a nominee for a named beneficial owner, with the agreement of that nominee and beneficial owner, to treat the named beneficial owner as the transferee for the purposes of establishing whether there has been a transfer of a going concern. Paragraph 8.2 contains an example you can use to record the agreement.
Persons transferring an interest in land to a person who’s a nominee for a named beneficial owner will be expected to check the VAT registration and where necessary the VAT elections made by the beneficial owner.
A nominee might exist to hold the legal title in property for a beneficial owner where the legal title is held:
- by 4 or fewer persons on trust for a partnership (this does not happen in Scottish law)
- on trust for an unincorporated association
- on trust for a pension fund
A TOGC cannot occur where the buyer is a nominee for a beneficial owner, as the beneficial owner will be the person carrying on the business, not the nominee.
The option does not need to apply to transactions where the nominee is the seller of the legal title. In these cases the beneficial owner will be treated as the seller.
These principles are based upon English land law but can also be applied to similar transactions in the rest of the UK as necessary.
8.2 Suggested format of a notice of agreement
The following notice of agreement is optional and other clear written evidence of agreement will be accepted by HMRC. The seller, buyer, beneficial owner and nominee should each retain a copy of any written evidence.
Notice of Agreement to adopt Statement of Practice
Future beneficial owner: (Z)
X, Y and Z confirm that they have agreed to adopt the optional practice set out in Customs & Excise Business Brief 10/96 in relation to the purchase of the property pursuant to an agreement dated ( ) between X and Y.
Following the transfer of the property Y will hold the legal title as nominee for Z, the beneficial owner.
Signed for and on behalf of X:
Signed for and on behalf of Y:
Signed for and on behalf of Z:
9. Further advice
HMRC does provide further advice, particularly where an unusual aspect has been identified in a potential TOGC. Normally the seller should make the request as it’s their responsibility to determine whether VAT is chargeable or not. It’s important that any request is made in writing, and:
- contains all relevant facts and information
- gives a clear indication of what aspects of the arrangement give rise to doubt or uncertainty
There are circumstances where we do not give VAT clearances, including on TOGC cases. These circumstances are listed in Find out about the Non-Statutory Clearance Service.
10. Transfer a VAT registration number
This section has force of law.
Form VAT68 must be completed if the seller and buyer of a business want to apply to transfer a VAT registration number.
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