Recently we have noticed that there appears to be a co-ordinated strategy by HMRC to review the national option to tax records whenever a business deregisters from VAT. Where the business had a property subject to an option to tax HMRC are looking into the reason for deregistration. Quite often the business will have been sold and if there has been no corresponding option to tax on the property by the new owner at the right time then VAT should have accounted for on the sale of the property.
The sale (or transfer) of a business or part of one is not a supply for VAT purposes provided certain conditions are met. In brief, these are:
• the assets of the business will be used by the acquirer in carrying on the same business,
• where the seller is VAT registered, the buyer must already be registered for VAT or become liable to be registered for VAT as a consequence of the transfer,
• if only part of a business is being transferred, then that part must be capable of separate operation,
• the purchaser must be able to operate the business so the employees, ongoing contracts, goodwill etc. must also be transferred,
• the business must be a going concern,
• there mustn’t be a series of transfers, and
• there mustn’t be a significant break in trading.
However, for the VAT free treatment to apply to an opted property, the buyer is required to notify an option to tax on the property and deliver this to HMRC before the supply is made. This is normally the date the transaction completes but it could be earlier if a deposit is received by the seller. In addition for certain properties, the buyer is required to make a declaration that the option to tax on the property will not be disapplied.
If the contract for the sale of the business doesn’t mention VAT or contains a clause that the agreed consideration is inclusive of VAT the seller is then in a difficult position if the buyer hasn’t opted to tax at the right time. A case of “Seller beware” and rich pickings for HMRC.
If you would like to discuss any issue arising from this article contact Ellen Main-Jeffrey, Head of VAT services on 01926 468707 or use our on-line contact form.