When someone buys the trade and assets of a business, they have the option of retaining the VAT number. How is this done, and what are the ‘pros’ and ‘cons’ of doing so?
Buying a Business
If someone buys the trade and assets of a VAT registered business, it can be treated as ‘transfer of a going concern’ (TOGC) for VAT purposes. This avoids charging VAT on the sale of the business. Transferring the VAT number
When someone buys a business as a TOGC, they have the option of taking over the VAT number of the original owners. This can be done by completing a form VAT 68 and submitting it to HMRC along with the VAT 1 application for VAT registration. The previous owner must not submit a VAT 7 application for de-registration.
Once the transfer of the registration has been allowed by HMRC, it cannot be revoked.
Changing the status of someone’s business (e.g., from sole proprietor to a limited company or partnership) is treated as a TOGC for VAT registration purposes, so the person can, if they wish, apply to retain the existing VAT registration number of their old business.
Advantages of Retaining VAT Number
There are some advantages to retaining the existing VAT number:
- Existing invoices and stationery can be retained;
- Administration during the changeover period is simplified;
- VAT return periods remain unaltered; and
- There is no disruption for supplies and customers checking the validity of a new VAT number.
Disadvantages of Retaining VAT Number
However, there are some potential disadvantages to retaining the VAT number when someone purchases a business. Retaining the vendor’s VAT number can create a potential problem because, in doing so, a business takes on all the VAT liabilities of the existing registration, and could be caught out by an assessment for mistakes made by the vendor. The procedure is, therefore, only suitable when the two parties are closely connected, or when someone is just changing the entity of the business.
A right to reclaim overpaid VAT belongs only to the person who overpaid it. In Shendish Manor Ltd [2004] UKVAT V18474, this was held to be so even if the VAT number had been transferred; the TOGC provisions only transfer the right to repayment of input tax.
However, in Pets Place (UK) Ltd [1996] VATDR 418 ( VTD 14642), the purchaser was held not to be liable for an assessment disallowing input tax to the vendor. Pets Place had taken over the VAT number and signed a VAT 68, but the latter referred only to paying VAT on supplies made by the vendor (i.e., to output tax, not to input tax that had been overclaimed).
Records
The business records remain with the vendor, but they must make them available to the purchaser in order to complete their VAT returns. HMRC can direct the vendor to pass the records over to the purchaser if requested to do so by the purchaser.
Any special scheme (e.g., the flat rate scheme, annual accounting, or a retail scheme) used by the vendor ceases at the date of the transfer, and the purchaser has to reapply to use them.
Paying VAT
The previous owner must cancel any direct debit they have set up to pay their online VAT returns, and the new owner must set up new direct debit instructions.
Practical Tip
If someone buys a business or changes the legal entity, they can retain the existing VAT number; this simplifies admin and their relationship with suppliers and customers, but they are liable for any errors made by the previous owners.