Buying a business after a temporary cessation of trade

Basic rules

If you buy a business as a transfer of a going concern (TOGC), the assets you purchase are usually outside the scope of VAT. However, this is subject to conditions. If these conditions are not met, VAT is charged based on the rate that applies to the assets in question, which is usually standard-rated. For example, an important condition of the TOGC rules is that if the seller is registered for VAT, the buyer must also be registered or liable to be registered at the time of the deal.

As the buyer of a business, it’s best if you are not charged VAT for two reasons:

• you might have to wait up to three months before claiming input tax on a VAT return thereby creating a potential cash-flow challenge, often for a large amount
• if you pay VAT to the seller incorrectly, HMRC has the power to disallow your input tax claim.

Goodwill is standard-rated, even though it is not a tangible asset, but it is outside the scope of VAT if the deal qualifies as a TOGC.

Period of closure

HMRC’s guidance confirms that one of the TOGC conditions is that there must be no significant break in trading when the buyer takes over a business. However, this is helpfully clarified by the comment that a short period of closure for repairs and redecoration can be ignored.

We suggest that you keep a diary to confirm that your break in trading is due to the renovation or repair work you are doing, rather than because, say, you are having a twelve-month holiday before you start trading. This will support your statement to the seller that there will be no significant break in trading when you take over.

If you purchase a business with seasonal trading, there is no problem with the TOGC rules if your break in trading is due to seasonal factors. For example, you might buy a seaside guest house in November and not open it until the following April or May. The TOGC condition will still be met.

Change of business model

Another condition of a TOGC is that you must intend to carry on the same type of business as the seller. Care is needed here to ensure you do not create a VAT problem. For example, there is no problem buying a public house that mainly sells beer and turning it into an upmarket cocktail or wine bar - you are still selling alcoholic drinks on a retail basis. But if you purchased a pub and converted it into an Indian restaurant, this would not be the same kind of business. You would then need to pay VAT on the assets you buy from the seller because the TOGC condition has failed. Each situation must be considered on its merits.

With a TOGC, all conditions need to be met for the proceeds to be outside the scope of VAT.