HM Revenue and Customs Brief 11/16 - VAT and the transfer of a going concern
Submit Articles Back to Articles
Published 24 June 2016
Purpose of this Brief:
a) This brief sets out the HM Revenue and Customs (HMRC) position
following the judgment of the Upper Tribunal in the case of Intelligent
Managed Services Limited (IMSL).
The case concerned the transfer of a business into a VAT group.
b) The brief also clarifies the situation where a business is
transferred to a person without an establishment in the UK.
- taxable persons transferring all or part of their business
into a VAT group
- members of VAT groups acquiring or disposing of businesses
- those involved in the transfer of a business to a person
not established in the UK
1. VAT and the
transfer of a going concern: VAT Groups and the Intelligent Managed
Services Limited judgment
Generally the supply of the assets of a business is taxable at
the standard rate of VAT. However, subject to certain conditions, the
supply of the assets of a business is treated as neither a supply of
goods nor a supply of services when these are transferred together with
all, or part, of that business as a going concern (article 5, VAT
(Special Provisions) Order 1995). At the time of the transfer the
transferee must intend to use the assets as a continuation of the
business activity of the transferor.
Corporate bodies which share a common control may choose to
register as a VAT group. The supply of goods or services between
members of a VAT group is ignored for VAT purposes (section 43(1),
Value Added Tax Act 1994). All onward supplies made by the VAT group
are treated as made by the representative member.
policy has been that where a member of a VAT group acquires a business,
and thereafter the only supplies are made to other members of that VAT
group, the acquisition can’t be treated as the transfer of a business
as a going concern for the purposes of article 5, VAT (Special
Provisions) Order 1995 (TOGC).
This is because with all subsequent supplies treated as made to and by
the same person, the transferor’s business ceases at the point of
transfer. Consequently the supply of the assets of the business by the
transferor to the transferee is subject to VAT.
In the case of Intelligent Managed Services Limited (
UKUT 0341 (TCC)), IMSL
had been developing a banking platform. It sold this part of its
business to Virgin Money Management Services Limited (VMMSL).
continued to develop the software and then supplied software services
to Virgin Money Bank Limited (VMBL).
used these services to supply retail banking to its customers. VMMSL
were at the time members of the Virgin Money Group VAT group (VMG). HMRC considered
that the supply of the assets of IMSL’s
business to VMMSL
was subject to VAT because that business ceased at the point of
The Upper Tribunal disagreed with this conclusion, saying that
the transfer of IMSL’s
banking support services business to VMMSL
was the transfer of a business as a going concern (TOGC).
The Upper Tribunal considered that while VAT grouping treats
the representative member as carrying on the business of each member of
that group, it doesn’t change the nature of the businesses carried on
by the individual members whose activities remain separate as a matter
of fact. Looked at objectively, VMMSL
hadn’t intended to liquidate the transferred assets but rather to carry
on the same kind of business as IMSL
as part of its own banking support services. Consequently, in its
judgment, there’s nothing in the VAT group rules that could prevent the
transfer of IMSL’s
business to VMMSL
from being a TOGC.
of the Upper Tribunal decision
now accepts that if a business is transferred to a company in a VAT
group and both:
- that company intends to continue to use the transferred
assets to operate the same kind of business in providing services to
other group members
- those other group members use the services to make supplies
outside of the group
then the transfer is a TOGC
at the first stage.
of a going concern from a VAT group
has also revised its policy relating to transfers out of a VAT group.
Where, were it not for the VAT grouping rules, a business exists, the
rules apply to transfers out of a VAT group. This supersedes guidance
in section 4.3 of Public Notice 700/9, which will be amended in due
Self-supply of assets
A VAT group that can’t recover all the VAT it incurs on its
purchases must, in certain circumstances, account for output tax on
assets coming into the group via a TOGC
(self-supply charge and Capital Goods Scheme (CGS)). For
information on VAT groups, self-supply and CGS, please refer
to VAT Notices 700/9: Transfer of business as a going concern, section
and 706/2: Capital Goods Scheme.
Stamp Duty Land Tax
There may be situations where a past overpayment of VAT
resulted in an overpayment of Stamp Duty Land Tax (SDLT), because SDLT was assessed
on a value that incorrectly included VAT.
If a business believes that it has overpaid SDLT, it may make a
claim for overpayment relief. The legislation relating to such claims
is at schedule 10, paragraph 34, FA 2003.
The criteria that must be met and the exclusions from claims
are set out at paragraph 34A of Schedule 10. Guidance can be found in
the Stamp Duty Land Tax Manual (SDLTM) at SDLTM52500 and 54000.
Case G (liability calculated in accordance with practice
generally prevailing - SDLTM54170) will not apply, and will therefore
not exclude a claim where the amount of the chargeable consideration
has been reduced as a result of the seller refunding the VAT.
Claims must be made within 4 years of the date of transaction.
will be unable to accept any refund requests for transactions that took
place more than 4 years before the date of claim. HMRC will also
not refund SDLT
unless the overpaid VAT has also been refunded.
2. VAT and the
transfer of a going concern: Non-established persons
This brief explains HMRC’s
policy in relation to transfers of a going concern where a
non-established person acquires a business, or part of a business, and
the person is not already a taxable person at the time of the
transaction, ie they have not registered for VAT by the time of the
A person is a taxable person if they are registered for VAT in
the UK or they are liable to be registered in the UK.
A non-established person is any person who is not normally
resident in the UK, who does not have a UK establishment and, in the
case of a company, is not incorporated there.
There are different rules for determining whether a
non-established person is liable to register for VAT than there are for
a person established in the UK. These are set out in Notice 700/1
Should I be registered for VAT?
It is a condition of treating a transaction as a TOGC
that where the seller is a taxable person the buyer must also be, or
immediately become as a result of the transfer, a taxable person. It is
therefore important for the seller to know the registration status of
the buyer so the correct tax treatment can be applied.
The UK has a compulsory VAT registration threshold for persons
established in the UK.
Where the buyer of a business, or part of a business, is not
already a taxable person then for the purposes of determining the value
of their taxable supplies they must treat as their own the taxable
supplies made by the seller prior to the purchase.
This is known as the ‘backward look’ and has the effect that
VAT registration cannot be avoided by transferring a business each time
its taxable turnover approaches the VAT registration threshold. It also
provides a degree of certainty for the parties involved in the transfer
with respect to taxable person status at the time of the transaction.
There is no VAT registration threshold for non-established
persons, who must register for VAT in the UK either immediately they
make any taxable supply there or if they expect to do so in the
following 30 days. As there is no registration threshold there is no
need for a ‘backward look’.
In these circumstances the seller may have less certainty over
whether the buyer will become a taxable person following the transfer.
Example: It may be the intention of a non-established and
non-taxable person to immediately suspend the newly acquired business
for a period of six weeks while the business premises are refitted.
There being no taxable supplies made or expected to be made within a
thirty day period following the transfer, the buyer would not be liable
to be a taxable person under the terms of the non-established person
legislation and the transaction cannot be a TOGC.
Where it is known that a non-established buyer will not be
making taxable supplies at the point of transfer and does not intend to
do so within the 30 day period, the non-established person has the
option to voluntarily register for VAT. If the seller is a taxable
person he must do so before the transaction for the TOGC
condition to be met. It is HMRC’s
opinion that a voluntary registration must be in place at the time of
the transaction for the TOGC
rules to apply.
supplies which span the date of the transfer of the business
Although there is no backward look for the non-established
person, in cases where a supply by the seller spans the date of the
accept that these become supplies made by the buyer immediately
following the transfer. So, for example, where a tenancy agreement has
effect at the time of the transfer the non-established person will have
made a supply which, assuming an option to tax is in place, will be
taxable and liability to register for VAT follows. In these
circumstances it would not matter that a consideration had not at that
point been received and was not perhaps expected within 30 days of the
transfer. When the consideration becomes payable and the fact that it
may be discounted by reference to a rent holiday has no impact.
About the Author
© Crown Copyright 2016.
A licence is needed to reproduce this article and has been republished
for educational / informational purposes only. Article reproduced by
permission of HM Revenue & Customs.
Follow us @Scopulus_News
Article Published/Sorted/Amended on Scopulus 2016-06-25 00:00:00 in Tax Articles