 Where a sale of a business as a going concern occurs there is a choice which needs to be made with regard to VAT. Assuming that the business is already VAT registered and will be required to be registered after the sale, then the registration may be transferred to the new owner. This has the advantage of allowing the transfer to go through without the need to charge VAT on the sale and aids a smooth changeover for VAT purposes. The main disadvantage is that all liabilities pass to the purchaser and without a clear agreement that the liability will be settled by the vendor, HM Revenue & Customs will seek recovery of any debts from the new owner.
Property transactions are a minefield where VAT is concerned and getting the chargeability of VAT is very important as the cost of an error can be very large. It is therefore important to take advice if there is any uncertainty. The first basic rule concerning properties is that most properties are exempt from VAT and as such there are no potential consequences resulting from a sale.
However, the owners of commercial properties (usually), can elect to waive the exemption or opt to tax a property. This means that all transactions relating to the property become standard rated (again usually!). Where a property has been opted any sale or lease attracts a VAT charge at 15% but also allows input VAT on any repairs or renovations to be reclaimed in full. No input deduction is allowed for properties which have not been opted. The reasons that this usually applies to commercial properties is that any VAT charged is likely to be reclaimed by a VAT registered purchaser so that there is no additional cost. Care must be taken for businesses which cannot register for VAT as this will make a considerable difference to their purchase cost.
In order to opt to tax a property, a written notification must be submitted to HMRC before the date of sale. In most cases, written approval is required to opt a property. HMRC are also keen to point out that the decision to opt must be made by appropriate people (e.g. directors) and that the decision should be documented and is made before any application is completed. Please note that once a property has been opted, this decision cannot be revoked for 20 years.
Debbie Pearce FCCA, VAT manager, Audit and accounts manager at Simpson Wreford (Chartered Accountants) can be reached at Debbie.Pearce@simpsonwreford.co.uk or Telephone: 020 8317 8297.