Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

VAT Transfer of a going concern

From
HM Revenue & Customs
Updated
, see all updates

Common areas of difficulty: deemed supplies of goods or services acquired by way of a TOGC

Under the normal rules, when a business gives away goods on which input tax has been recovered, VAT is due on that disposal under schedule 4 paragraph 5 VAT Act 1994.

One-off 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 purchaser.

This interaction between free of charge disposals and the TOGC provisions was open to manipulation. For example, a large company in the financial sector (primarily making exempt supplies) could have set up two fully taxable subsidiaries. The first subsidiary purchases goods, deducts input tax and leases the goods to the parent company for a period of weeks, charging output tax. The business of the first subsidiary is then transferred to the second subsidiary as a TOGC. To qualify for the TOGC treatment, the acquirer (the second subsidiary), continues leasing goods to the parent company, again for a short period. The goods are then given by the second subsidiary to the parent company. No output tax was due on that disposal because the second subsidiary would not have had the benefit of input tax when those goods were acquired.

This loophole has now been closed. Schedule 4 paragraph 5 of the VATA 1994 and the Value Added Tax (Supply of Services) Order 1993 have been amended so that 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 chargeable on any subsequent free supply of those goods or services.

Further related guidance may be found in V1-3: Supply and Consideration and Notice 700/35Business Gifts and Samples.