The VAT recovery on expenses such as Accountancy and Legal on Selling part of a business which comprises exempt business e.g. residential lets and taxable activities such as Landscaping, Maintenance services etc can be tricky as the business carried out is partly exempt, professional fees are usually put in his residual input tax, but as a transfer of a going concern is not a supply, the procedure for input recovery needs to be considered properly.
Where certain conditions are met the sale of a business is treated as the transfer of a going concern which is not a supply for VAT purposes. the conditions to treat the transfer of a business as a transfer of a going concern are briefly summarised below:
- The assets being transferred must put the transferee in possession of a business capable of being operated;
- The business, or part of a business, must be a going concern at the time of the transfer;
- The transferee must intend to use the assets to operate the same kind of business;
- There must not be consecutive transfers of the business;
- If the transferee is a taxable person the transferee must be taxable or become one as a result of the transfer, and
- There must be no significant break in trading.
Although the transfer of a business as a going concern is not a supply for VAT purposes, the costs are treated as a general overhead of the business; or if only part of a business is sold, a general overhead of that part of the business. Input tax may be recovered depending on the nature of the business being transferred. If the part of the business being sold is fully taxable, then input tax on the selling costs can be recovered in full.
Conversely, if the exempt side of the business were sold the input tax would be irrecoverable (subject to the de minimis rules), and if a partly exempt business were sold the input tax would be residual and recoverable in accordance with the seller’s partial exemption method.
This guidance is set out in HMRC Input tax in this paragraph refers to input tax incurred on items such as legal fees, advice etc. by the purchaser or seller in relation to a TOGC. It does not refer to tax charged by the seller on the assets transferred which is different.
Input tax incurred by the purchaser can be recovered in accordance with the use to which the purchased assets will be put, therefore if the assets are used exclusively to make taxable supplies, the VAT incurred on the cost of acquiring them should be attributed to those taxable supplies and can be recovered in full. Similarly, if the assets of the purchased business are to be used exclusively to make exempt supplies, none of the input tax on the cost of acquiring them can be recovered. If the assets are to be used in making both taxable and exempt supplies, any input tax incurred is non-attributable and must be apportioned in accordance with the purchaser’s agreed VAT partial exemption method.
In the seller’s case, the sale of the business is not a supply and the input tax incurred on the costs of selling it cannot be attributed to any supply by him. These costs are therefore treated as a general business expense and the input tax is residual input tax that will have to be apportioned in accordance with the seller’s partial exemption method. See also Partial Exemption. Therefore selling a fully taxable part of the business entitles the seller to treat the VAT incurred in respect of the sale as taxable input tax and recoverable.
The information contained in this article is for general information purposes only and does not constitute advice, Whilst we endeavour to keep the information up-to-date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability for a particular purpose. We recommend that professional advise should be taken from a suitably qualified expert before undertaking any action.