Staff tax tips for this week are listed below. We have added links to more detail as appropriate. We will be adding a least two posts a month under this heading so please ask your staff to add their names to our newsletter distribution list that will link to these articles.
What is the relevance of the “going concern” principle for VAT purposes?
When a business is sold each sale of chargeable business assets is a VAT able transaction: the seller is obliged to charge VAT to the purchaser. By concession, HMRC will allow the transaction to proceed with no VAT charged if the business is transferred as a going concern (TOGC).
To qualify as a TOGC, the following principles should be observed:
- The assets must be sold as part of a ‘business’ as a ‘going concern’*
- The purchaser intends to use the assets to carry on the same kind of business as the seller
- Where the seller is a taxable person, the purchaser must be a taxable person already or become one as the result of the transfer
- Where only part of a business is sold it must be capable of separate operation
- There must not be a series of immediately consecutive transfers
- There are further conditions in relation to transactions involving land.
The significance of this concession should not be underestimated. Consider a business selling chargeable assets of £500,000. Without the TOGC rule, the purchaser would have to pay VAT on their purchase of £100,000, they will be able to claim this back on their first VAT return after purchase, but will need to fund the extra cost for up to four months.
According to HMRC the TOGC was introduced to:
- relieve the buyer of a business from the burden of funding any VAT on the purchase, thereby helping businesses by improving their cash flow and avoiding the need to separately value assets which may be liable at different rates or are exempt and which have been sold as a whole, and
- protect government revenue by removing a charge to tax and entitlement to input tax where the output tax may not be paid to HMRC, for example, where a business charges tax, which is claimed as input tax by the new business but never declared or paid by the old business.
Ames v Revenue & Customs
This case considered a claim for CGT exemption when EIS shares were subsequently sold. HMRC disallowed the exemption as no income tax relief had been claimed by the taxpayer on subscription.
Non-statutory advance clearance from HMRC
HMRC will offer non-statutory advance clearance for certain transactions. This can be useful to add certainty to a proposed course of action. They will not offer:
- a clearance on matters of fact, such as if certain activities constitute a business,
- clearances or advice in respect of the application of the ‘settlements legislation’ in Chapter 5 Part 5 Income Tax (Trading and Other Income) Act 2005, or the tax consequences of executing non-charitable trust deeds or settlements,
- clearances relating to the venture capital schemes (Parts 5 to 6 of Income Tax Act 2007).