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HMRC internal manual

VAT Transfer of a going concern

HM Revenue & Customs
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Transfers and VAT Groups: reduction in tax due

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.