When a business is bought or sold, one of the key tax considerations is how the transaction should be treated for VAT purposes. While many transactions involving the sale of assets are subject to VAT, certain business transfers may qualify as a Transfer of a Going Concern (TOGC), meaning the transaction can be treated as outside the scope of VAT.
The VAT implications of a transaction can have a significant impact on cash flow, deal structuring and timing. Understanding whether TOGC treatment may apply at an early stage can help businesses avoid unexpected costs and reduce the risk of disputes with HMRC.
In this article, we explain what a TOGC is, when TOGC treatment may apply, and some of the common VAT issues businesses should consider when buying or selling your business.
Important: Don’t confuse a Transfer of a Going Concern (TOGC) with a going concern assessment. A TOGC is a VAT concept that may apply when a business is transferred from one owner to another. A going concern assessment is an accounting and financial reporting concept used when preparing financial statements.
What is a Transfer of a Going Concern (TOGC) for VAT purposes?
A Transfer of a Going Concern, commonly referred to as a TOGC, arises where a business, or part of a business, is transferred from one party to another and certain conditions are met.
Where the requirements for TOGC treatment are satisfied, the transfer is treated as being outside the scope of VAT. There is no option to elect into or out of this treatment; if the conditions are met, TOGC treatment is mandatory. In practical terms, this means VAT doesn’t need to be charged on the sale.
The rules exist to facilitate business transfers by preventing VAT from creating unnecessary cashflow burdens, or even VAT costs. Without TOGC treatment, a buyer may have to fund VAT on completion and recover it through their VAT accounting at a later date, in full or in part depending on the nature of their business.
TOGC treatment can apply across a range of transactions, from the sale of an entire trading business to the transfer of a property letting business or a distinct business division.
When can TOGC VAT treatment apply?
Whether a transaction qualifies for TOGC treatment will depend on the specific facts and circumstances. While the detailed rules can be complex, a number of key principles generally need to be considered.
The business must be capable of continuing
The transfer must involve more than the sale of assets – typically both tangible and intangible assets. Broadly speaking, there needs to be a business operation that is capable of continuing separately after the transfer.
This is one of the key distinctions between a business transfer and a simple asset sale.
The buyer must continue the same kind of business
The buyer must intend to carry on the same kind of business activity as that conducted by the seller.
This doesn’t necessarily mean the business must continue in exactly the same way, although that is the typical way of approaching TOGC considerations. However, where the buyer’s intentions differ significantly from those of the seller, TOGC treatment may be unavailable.
VAT registration considerations
The VAT status of the buyer is also important. Depending on the circumstances, the buyer may already need to be VAT registered or may be required to become VAT registered as part of the transaction.
Failure to address VAT registration requirements at the appropriate stage can create complications and potentially affect the VAT treatment of the transfer.
Partial transfers
TOGC treatment isn’t limited to the sale of an entire business.
In some circumstances, it may also apply where part of a business is transferred, provided the transferred activities represent a viable business operation that can continue independently.
Given the complexity of these rules, specialist advice should be sought where there is any uncertainty.
TOGC and business sales
For business owners considering a sale, VAT is one of several tax issues that should be addressed early in the transaction process. Where the conditions are met, TOGC treatment may allow the transfer to take place outside the scope of VAT, potentially reducing cashflow implications for both buyer and seller.
Whether a transaction qualifies for TOGC treatment will depend on the specific circumstances. VAT should therefore be considered alongside the wider legal, commercial and tax aspects of the sale.
For broader considerations when preparing for the sale or transfer of a business, read our article on business succession planning and exit options.
The alternative to a trade and assets disposal is the sale of the company to a new owner, and in that instance TOGC becomes irrelevant, as there is no underlying sale of assets and no transfer of a business activity.
HMRC guidance on TOGC
HMRC’s guidance, and its interpretation of the relevant legal provisions which apply to TOGCs, sets out the conditions that must be satisfied for a transfer to qualify as a TOGC and fall outside the scope of VAT. However, applying those rules in practice is not always straightforward, particularly where property, partial business transfers or complex transaction structures are involved.
For this reason, businesses should not assume TOGC treatment will automatically apply simply because a business is being sold. The VAT position should be assessed based on the specific facts of the transaction.
TOGC and property transactions
Property transactions are often among the most complex for TOGC purposes.
A common example is the transfer of a property letting business. Where a property subject to existing leases is sold, the parties may consider whether TOGC treatment is available.
However, additional issues frequently arise, including:
- Whether an option to tax has been exercised by the seller, in which case the buyer needs to meet additional conditions for TOGC treatment to apply,
- The buyer’s future intentions for the property,
- The structure of the property business being transferred, and
- Interaction with wider transaction taxes.
As with wider UK property tax considerations, property-related TOGCs require careful analysis and early planning. An incorrect assumption regarding VAT treatment can have significant financial consequences for both buyer and seller.
Similar issues can also arise when acquiring estates, property businesses and other rural properties, where VAT, SDLT and transaction structuring considerations often need to be reviewed together. For more information, read our article on buying rural property.
For this reason, specialist VAT advice is often essential where commercial property forms part of a transaction.
Common TOGC issues and pitfalls
Although the principles behind TOGC treatment appear straightforward, difficulties often arise in practice.
Assuming TOGC applies automatically
A common misconception is that the sale of a business or the sale of assets automatically qualifies for TOGC treatment. In reality, each transaction must be assessed on its own facts and circumstances.
Timing issues
VAT registration requirements and transaction timing can be critical. Where steps aren’t taken at the appropriate stage, the desired VAT treatment may be jeopardised.
Property complications
Property transactions frequently involve additional layers of complexity, particularly where options to tax have been exercised or where property assets form only part of a broader transaction.
Documentation and transaction structuring
Poorly drafted documentation or failure to address VAT issues during transaction negotiations can create uncertainty and increase the risk of challenge after completion.
Considering VAT issues at an early stage of the transaction process can help mitigate these risks.
Practical examples
Example 1: Sale of a trading business
A manufacturing company is selling its trade and assets to a third-party competitor who will absorb the trade into its existing manufacturing business. However the facility in which the manufacturing activities are carried out will be retained by the seller, and the seller will lease to the buyer. TOGC is not straightforward in these circumstances and the position would likely turn on whether the assets that are being acquired by the buyer (which would not include the lease interest as this would be a newly created asset on completion) are capable of separate operation as the trade. This becomes a very fact specific determination.
Example 2: Property letting business
A company owns a commercial property which it uses for its own business purposes and also lets out to tenants. The property is sold with the benefits of the existing tenancies, and the current owner will also remain in occupation as a tenant of the buyer. A common situation and TOGC is achievable in these circumstances.
Example 3: Transfer of a business division
A partnership owns three farms which it operates in-hand. It is selling one of the farms to a buyer who intends to lease that farm to a tenant farmer following the acquisition. Whilst a farm would typically be capable of separate operation (separate from the other two farms owned here) TOGC would not be achievable in these circumstances as the buyer is not intending to carry on the same type of business as the seller. Letting a farm to a tenant is a materially different type of business activity to farming in-hand.
FAQs
What does TOGC mean?
TOGC stands for Transfer of a Going Concern. It’s a VAT concept that may apply when a business, or part of a business, is transferred from one owner to another.
Is a Transfer of a Going Concern outside the scope of VAT?
A qualifying TOGC is neither a supply of goods or services for VAT purposes and is therefore outside the scope of VAT. This is different from a supply subject to a VAT exemption or the 0% VAT rate.
Does the buyer need to be VAT registered?
The buyer being a taxable person is a condition for TOGC treatment to apply. In some instances, it is necessary for the buyer to receive their VAT number from HMRC before the transfer completes, which can delay matters considerably.
Can TOGC apply to part of a business?
Yes. In some situations, TOGC treatment may apply to the transfer of part of a business, provided the activities transferred are capable of operating separately as a business in their own right.
Does TOGC apply to property transactions?
Potentially. TOGC treatment can be particularly relevant in property transactions, although these cases often involve additional complexities and require careful analysis.
What happens if VAT is charged incorrectly?
Incorrect VAT treatment can lead to additional administration, delays and potential disputes. Obtaining advice before a transaction completes is generally preferable to resolving issues afterwards. Incorrectly charged VAT by a seller is not recoverable by the buyer, as a general principle.
Is TOGC relevant when selling a business?
Yes. TOGC treatment is often considered as part of business sales, mergers, acquisitions and wider transaction planning exercises. A TOGC will only occur though in trade and asset sales. Disposing of a company by selling the shareholding in it will not be a TOGC.
How we can help
Determining whether TOGC treatment applies is rarely a simple box-ticking exercise. The VAT consequences of getting it wrong can be significant, particularly where large transactions or property assets are involved.
Our VAT specialists work with business owners, finance teams and advisers to help assess the VAT implications of transactions, identify potential risks and support businesses through the planning and implementation process.
If you’re considering buying, selling or restructuring a business and would like advice on the VAT position, please get in touch with our team.
Contact us
Partner, Bristol
Key experience
