Vat issues and transfer of a going concern

When acquiring commercial property it is really important to identify at the outset whether or not your transaction is a transfer of a going concern (“TOGC”).  It is so important because if you get it wrong you could be liable to pay Vat on the purchase price at 20%.  Get it right, and it means that Vat will not be payable by the buyer on the acquisition as long as various conditions for the TOGC are satisfied.

So what is a TOGC?  

A TOGC can be any of the following and this is not an exhaustive list:

•    A disposal of an investment property that is subject to a lease;

•    An occupier disposing of property as part of a business sale;

•    A developer disposing of a development site whilst in development.  

The elements that make up a TOGC are that the assets being sold must be part of a “business” as a “going concern”.  These assets must be used by the buyer with the intention of carrying on the same business (but this does not have to be an identical business) to the seller. Please note however that if the business of the seller is to let the property to a trader and the buyer is a trader, then the same business will not be said to be carrying on. In such situations the buyer will need to purchase the property in the name of one entity and then grant a lease to the trading entity in order to qualify.  

In addition to the above the seller must be a taxable person or become a taxable person as a result of the transfer. In respect of land that is automatically standard rated for vat purposes, or is subject to an option to tax by the seller, the buyer must also register for Vat and opt the land for Vat as well.  

As long as the above conditions are satisfied then the transaction will be a TOGC and the buyer will not have to pay Vat on top of the purchase price.

It is best practice for the solicitors acting for the buyer and the seller to document in the sale contract the TOGC, setting out clearly the obligations of the seller and buyer in relation to Vat and the target property.    

So make sure you address this important point right at the beginning of your transaction as failing to do so could mean you have to pay Vat on the purchase price and that amount could be very substantial indeed.