Reasons to choose Wilson Browne
Generally, a purchase of commercial property or the acquisition of a new lease is exempt from VAT, unless the Seller or Landlord has opted to tax, and even then there are exceptions to that rule!
When purchasing or even renting a commercial property, it is important to be aware of all the costs upfront so you can make an informed decision about whether the transaction is commercially viable for you and your business.
VAT can substantially increase the overall price on a purchase or the amount of rent paid on a lease of the properties, so it is pertinent to know whether that includes your purchase or not. It can also significantly increase the Stamp Duty Land Tax liability on a transaction. It is important to seek legal advice from the outset, coupled of course with advice from your accountant – no one likes costly surprises!
What is VAT?
VAT is a consumption tax that is charged on goods and services commercially provided. It is designed to be borne by the final consumer, but the tax is charged on all goods and services commercially provided, including those provided to businesses. Accordingly, one of the key features of VAT is the mechanism for businesses to deduct VAT that they are charged. As VAT is charged on the price of the goods or services, the result should be that businesses account to HMRC for VAT on the value that they have added. The final consumer, who is unable to deduct the VAT charged, bears the cost of the VAT on the final sale price, which reflects the value of goods and services used in producing the product to the final consumer.
The Seller/Landlord has opted to tax; do I have to pay VAT
In some case the seller and/or landlord has opted to charge VAT at the standard 20% rate. This is so they can recover VAT charged on any costs related to the property; this is commercially beneficial to them, but not so much for you or your business!
However, even in these circumstances, VAT may not be payable if the transfer is considered to be a transfer of a business as a going concern. A Transfer Of a Business as a Going Concern (“TOGC”). can involve the sale of assets which would normally be taxable supplies. However, special VAT rules mean that a TOGC is not regarded in economic terms as being a supply of goods or of services. Therefore, where there is a TOGC, no VAT is chargeable.
There are of course conditions to this :
- The assets are sold as part of a ‘business’ as a ‘going concern’ – is the property being purchased or the lease being granted incidental to purchasing a trading business?
- The buyer intends to use the assets to carry on the same kind of business as the seller – Are you basically purchasing a “ready made” business and do not intend to change what you produce, sell or what services you provide or dispose of any of the assets immediately?
It is a TOGC, but how long must the business be carried on post-transfer?
Neither the legislation nor HMRC guidance stipulate how long a seller’s business has to be carried on post-transfer to qualify for TOGC treatment. However, HMRC guidance suggests the buyer’s intention to carry on the business, at least initially, are vital. The guidance also states that it is not possible to set definitive rules on how long a business needs to be carried on to be a continuing business.
Provided that the original business is carried on initially, the termination or restructuring of the seller’s business may not deny TOGC treatment. In particular, HMRC confirms that if a buyer intends:
- In due course to carry on a different kind of business using the assets purchased, the sale may still be a TOGC if the buyer continues the old business initially
- To restructure a business such that it will not be the same but they operate the business in the same way, even for a very short period, the buyer will have carried on the same kind of business and met the condition.
- In addition, HMRC states that any breaks in trading must not be significant, For example, a short period of closure for redecoration will not deny TOGC treatment.
- Where the seller’s business is VAT registered, the purchaser must already be a taxable person or become one as a result of the transfer – This is self-explanatory, you must already be registered for VAT purposes or your turnover must becoming as such that you would need to register
- Where only part of a business is sold it must be capable of separate operation – for example you are selling the manufacturing side of your business, but retaining the sales side, can they be ran as truly separate businesses?
There must not be a series of immediately consecutive transfers – to minimise fraud and tax avoidance
There seem to be lots of different rules to consider and lots of if’s, but’s and maybe’s, how can I be sure?
The simple answer is take advice! Speak to both your solicitor and your accountant at an early stage. Tax and VAT are complex areas of law and require specialist advice. If you were to find out that your purchase is subject to VAT much later on in a transaction this could substantially alter your position, and may mean the transaction is no longer commercial viable – it would be best to find this out at the outset, not after you’ve already incurred unnecessary costs.