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HMRC internal manual

VAT Transfer of a going concern

Transfers and VAT Groups: Partly exempt VAT group acquiring a business as a going concern

If a business is transferred to a company in a VAT group and both

·        that company intends to continue to use the transferred assets to operate the same kind of business in providing services to other group members

·        those other group members use the services to make supplies outside of the group

then the transfer of the business to this initial company is a TOGC.

The Finance Act 1987 introduced the requirement for a partly exempt VAT group to account for VAT when it acquires business assets on the transfer of a business as a going concern. The provision was introduced as an anti-avoidance measure and is now contained in s44 VAT Act 1994 reproduced at VTOGC1100

The situation which gave rise to s44 is as follows. A partly exempt VAT group sets up a company outside the VAT group which then purchases capital assets for onward leasing to the VAT group. The new company recovers the input tax on the goods in full. The new company then transfers the assets and its interest in the leases to a group member. This is a TOGC and therefore a non-supply (except to the extent that it concerns land and the special rules are not met). Subsequent lease payments are covered by the grouping rules of s43 VAT Act 1994 and disregarded. Without s44 the assets would be obtained practically VAT free with consequential savings.

Under s44, the group acquiring the assets must treat the transfer as both a supply to the group and a supply by the group. In practice therefore they must account for output tax on the assets being acquired with the input tax recoverable according to the partial exemption method in operation. The input tax is not attributable to the self-supply.

There are two basic requirements both of which must be met.

a.     the transfer of the assets must not be a taxable supply by virtue of Article 5 of the VAT (Special Provisions) Order; and

b.       the acquiring company must be a member of a VAT group, which is partly exempt, or becomes partly exempt during the tax year.


Tax is not due on:

c.       assets which were assets of the previous owner more than 3 years before the date of the transfer (s44(3));

d.       any zero-rated or exempt assets;

e.       goodwill (this is excluded administratively, not by s 44); or

f.        assets subject to the capital goods scheme (s44 (4)): details of how to deal with CGS are at VTOGC5250

The 3 year cut off point was originally introduced so as not to penalise the genuine reorganisation of asset holdings between associated companies. It was thought that any input tax advantage would be minimal once the assets were three or more years old. However, this has not proved to be the case and tax avoidance schemes whereby the TOGC takes place three years and one day after the assets were originally purchased, have been devised.

However, powers under VATA 1994, Schedule 9A allows HMRC to reverse the “mischief” of this scheme either by directing that the transferor is treated as a member of the group with effect from a date before the goods were bought or by directing that the subsequent intra-group supply be brought outside the scope of section 43(1) “disregard”.

The value of the supply by and to the representative member is the open market value of the assets by virtue of s44 (7) and 44(8). When the assets are being bought from a person unconnected with the group this will usually be the consideration paid. Where the seller is connected to the group, care should be taken to ensure that the value placed on the assets is realistic.

Where VAT is not due on some of the assets, the consideration must be apportioned between those assets on which tax is due and the other assets. This apportionment must be fair and reasonable.

In certain circumstances, under s44(9) we can reduce or even cancel the VAT due. How any reduction is to be calculated is not detailed in the legislation. A suggested approach is given below, but any method proposed which gives a fair and reasonable result is acceptable.

The business must show that the person from whom he has acquired the assets did not recover in full the input tax when it acquired the assets itself. This will happen when the seller is himself partly exempt or the input tax is “blocked” e.g. cars. If there were no reduction, the restriction of input tax on the self-supply would create double taxation as some tax has already stuck with the seller when he purchased the assets originally.

Where the seller’s recovery rate (under its partial exemption method) is greater than the purchaser’s recovery rate the purchaser should suffer a further restriction of input tax. The difference between the rates identifies the extra we want and we can abate the tax due to that amount i.e. use the balancing percentage as the rate of non-recoverable input tax and not the (higher) normal non-recovery rate.

Where the seller’s recovery rate is equal to or less than the purchaser’s recovery rate the original input tax restriction is equal to or in excess of the purchaser’s input tax restriction. The revenue has not lost out, there is no extra tax due (i.e. it is remitted in full) but note that no tax is to be refunded.