PE62500 - Other Partial Exemption issues: Transfers of Going Concerns (TOGC)

When considering input tax incurred in relation to a Transfer of a going concern, it is important to differentiate between the costs incurred by the transferor (the seller) and transferee (the purchaser). When a transferor sells his business as a TOGC, and the conditions set out in the law are met, the supply of the assets is treated as neither a supply of goods nor a supply of services [VAT (Special Provisions) Order 1995, Article 5].

Transferor

As a TOGC is not a supply for VAT purposes, associated input tax is residual. Our old policy was therefore to allow recovery by the provisions of whatever PE method was in place.

Following the Abbey National case (CJEC C-408/98), our policy was changed from 1 August 2001. When a transferor disposes of assets in a TOGC and the transfer costs have a direct and immediate link solely with the transferred part of the business, then the input tax incurred on those costs is attributable to the supplies made by that clearly defined part of the business.

Where that part of the business only makes taxable supplies, then the input tax is fully recoverable. Conversely, where that part of the business only makes exempt supplies, the input tax is irrecoverable. However, where that part of the business makes taxable and exempt supplies, then the input tax is recoverable in accordance with the partial exemption method in place.

Transferee

Similarly input tax incurred in acquiring a business in a TOGC is residual and our policy was to put it through the normal PE method.

Following the UBAF case (LON/91/26 23Y) - our policy was changed. From 1 June 1996, where assets are used exclusively to make taxable supplies, the input tax incurred in acquiring those assets is fully recoverable. Conversely, if the assets are used exclusively to make exempt supplies, the input tax incurred in acquiring those assets is irrecoverable. However, if the assets are used to make both taxable and exempt supplies, the input tax is recoverable according to the partial exemption method in place.

Application of s44 VAT Act 1994

In general, businesses, which are partly exempt and part of a VAT GROUP registration, may acquire assets as a transfer of a going concern. Where the company selling the assets has gained a greater recovery in respect of the input tax incurred on the purchase of the assets than the PE method of the acquiring company would allow, there is the potential for the acquiring company to incur a VAT charge equivalent to the difference. The charge takes the form of a self-supply at the time the goods are acquired.

Detailed guidance on the rules and the application of s44 can be found in VTOGC.