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HMRC internal manual

VAT Transfer of a going concern

HM Revenue & Customs
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Transfers and VAT Groups: Partly exempt VAT group acquiring a business as a going concern

Where a business is sold and the purchaser is part of a VAT group and uses the new acquisition simply to make supplies to VAT group members, the business has effectively ceased and it cannot be treated as a TOGC. However, if supplies are also being made to businesses outside of the VAT group, a TOGC is possible.

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 VTOGC8300).

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. However, where the Commissioners are satisfied that certain conditions have been met and that the transaction was not carried out for bona fide commercial reasons, VATA 1994, Schedule 9A (introduced by the FA 1996, s31) gives us the power to issue notices of direction to reverse the tax avoidance effect of the transaction. Without s44 the assets would be obtained practically VAT free with consequential savings.