Would VAT apply to the sale of the business, or could this be structured as a transfer of a going concern (TOGC)?
VAT is not usually payable on commercial property transactions involving the Transfer of Going Concern (“TOGC”).
TOGC applies where assets are being sold together in the form of something that is capable of being run as a business, and the buyer intends to use those assets to carry on the same type of business.
Because of the tax benefit of this rule, the eligibility requirements are strict. For example, ensuring the contract specifies the transaction is to be treated as a TOGC, both buyer and seller are VAT registered, both buyer and seller have elected to charge vat, and both buyer and seller use the property for the same business purpose both before and after the transaction.
TOGC will fail where the buyer does not carry on some other, taxable, business, and is therefore not a taxable person.
Where the transaction does not qualify as a TOGC, the transfer will require specialist advice to manage the resulting tax implications.
What are the current applicable VAT rates?
There are currently three VAT rates applicable to the sale of goods and services in the UK:
• Standard rate (20%) – default for all goods and services.
• Reduced rate (5%) – for qualifying goods and services such as children’s car seats.
• Zero rate – as specified in Schedule 8 of VATA 1994, e.g. new houses, books, newspapers and children’s clothes.
Some items are completely exempt from VAT. The majority of exports for example are zero-rated. Zero rating is preferable to exemption as the VAT on costs incurred in making a zero-rated supply can be recovered, unlike for exempt.
What are VAT schemes?
When you become VAT registered, you will by default be assigned to the Standard VAT Accounting scheme. This may not however be the most beneficial option for your business or circumstances taking cash flow, administration requirements and market sector into consideration.
• Standard VAT Accounting scheme: enables you to reclaim VAT at the point an invoice is received from a supplier, and makes you liable for VAT at the point you send an invoice to a customer. You are liable for the VAT even where the customer has not paid after six months.
• Flat Rate scheme: aimed at small businesses (less than £50,000 turnover) to ease the administrative burden of accounting for VAT. Businesses pay a rate as a percentage of turnover rather than calculating VAT on every transaction. Using this scheme you don’t have to calculate the VAT on each and every transaction. The rate payable will be determined by HMRC, depending on your market sector.
• Cash Accounting Scheme: VAT is payable when the customer pays, and can only be reclaimed when purchases have been paid for. To be eligible, your estimated VAT taxable turnover must be less than £1.35m.
• Annual Accounting scheme: you pay the VAT owed throughout the year in nine monthly or three quarterly instalments on the basis of only one annual return. These instalments are based on the VAT you paid in the previous year, or an estimate if you have been trading for less than a year. To be eligible, your estimated VAT taxable turnover must be less than £1.35m. You can make additional payments as and when you wish.
How long do you need to keep VAT records?
You must keep VAT records for at least six years, either in paper form or electronically, but they must be accurate, complete and easy to access.
You must keep a VAT account, separating records of the VAT you charge and the VAT you pay on your purchases.
Photocopies of VAT invoices cannot be used.