Selling your business as a transfer of a going concern?
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In the recent case of Tezgel (t/a Master Chef) v Revenue & Customs [2007] UKVAT V20462 (19 November 2007), the VAT Tribunal upheld HM Revenue & Customs' assessment that the sale of a restaurant business was not a transfer of a business as a going concern (TOGC) because the buyer did not carry on a restaurant business after the transfer. Instead, the buyer had granted a licence to a third party to carry on the restaurant business from the premises.

The decision illustrates the importance of the seller checking whether the buyer intends to carry on the same kind of business following the transfer and putting in place appropriate documentation to protect the seller's VAT position.

Background

Under UK tax rules, in general, and provided certain conditions are met, no VAT will be chargeable on the transfer of a business or part of a business as a going concern. The main conditions are that:

• The seller is a taxable person  (www.practicallaw.com/3-107-7365) .
• The buyer is a taxable person or becomes a taxable person immediately as a result of the transfer.
• The assets that are being transferred are to be used by the buyer in carrying on the same kind of business, whether or not as part of any existing business, as that carried on by the seller.

Facts

In the Tezgel case, the Seller sold the business to Mr. Kocak (the Buyer) on 5 January 2005. The Seller applied for TOGC treatment of the sale, but this was rejected by HMRC on the basis that the Buyer was not using the assets acquired to carry on the same kind of business as the Seller. Instead, the Buyer was using the premises as an investment, effectively receiving rent in return for granting a licence to another individual, Mr Karaaslan, to occupy and trade from the premises. The Seller appealed on the basis that he thought that the Buyer was buying the restaurant as a going concern with a view to running it himself, and that he was not required to ascertain what the Buyer was actually going to do with the business. Furthermore, the Seller’s view was that Mr. Karaaslan was the restaurant manager, and that the Buyer was conducting the business through him.

The VAT Tribunal dismissed the appeal and confirmed that in order for a transfer to qualify as a TOGC, it is manifestly not enough for the seller to transfer the assets and then say that he need not concern himself with the buyer’s subsequent actions. The buyer must in fact carry on the same kind of business as that conducted by the seller. Additionally, Mr Karaaslan was effectively paying rent for an informal licence to use the premises because the payments flowed from Mr. Karaaslan to the Buyer and Mr. Karaaslan accepted that he was running the business for VAT purposes (evidenced by the fact that Mr Karaaslan filed the relevant VAT registration forms).

Comment

The Tezgel decision illustrates the importance of the seller checking whether the buyer intends to carry on the same kind of business as that which it has been carrying on before the transfer. It also illustrates the importance of putting the right documentation in place. The VAT Tribunal pointed out that it is customary for business sale agreements to contain a provision confirming that the buyer intends to carry on the same kind of business as that carried on by the seller. Indeed, such a provision is often in the form of a warranty so that the seller has a right of action against the buyer if the warranty is subsequently breached. Most importantly however, the seller's advisers should ensure that a business sale agreement always contains a provision confirming that the purchase price is exclusive of VAT, and also a provision confirming that the buyer will pay VAT (on the seller producing a valid VAT invoice) in the event that the parties treat the transfer as a TOGC but HMRC subsequently determines otherwise.

Without these provisions, the seller will have to account to HMRC for VAT on any VAT-able transaction but will not be able to recover that VAT from the buyer. Such provisions will only give rise to adverse tax consequences for the buyer, if the buyer does not use the assets in carrying on a fully taxable business and/or if the VAT increases the consideration for stamp duty land tax purposes.

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