There are three common ways in which a business can be sold:
- Sale of asset
- Sale of business ownership by sale of shares
- Sale of business as a going concern
VAT applicability is different in each of the three mentioned scenarios.
1. Sale of asset:
Normally, when a supplier undertakes to sale part of the business assets it is treated as a taxable supply subject to VAT. In case of sale of bare land or residential property being sold no VAT is applicable as the supply is exempt for VAT purpose.
For example, a manufacturer selling its factory building on its own is a supply of a good and is subject to VAT at 5%.
2. Sale of business ownership by sale of shares
A company can be bought and sold by transferring shares of that company. The company itself is not involved in the transaction and therefore such a transfer of shares does not give rise to any changes in the business operations of the company – it still retains all its assets, liabilities, licences, employees and relationships. The new owner takes over the purchased company with all of its assets and liabilities – including any existing tax obligations of the company.
3. Sale of business as a going concern
A transfer of business as a going concern is a type of an asset sale, not a share sale. Where assets are sold as part of a transfer of a business as a going concern, the transfer is not a supply at all and therefore no VAT is charged. This treatment applies to a transfer of the business irrespective of the VAT treatment which would apply to any of the underlying assets that are being transferred.
For example, a manufacturer selling its factory building on its own is a supply of a good and is subject to VAT at 5%. On the other hand, the manufacturer selling the factory building together with manufacturing equipment, and employment and supply contracts may be a transfer of business as a going concern, and therefore not a supply for VAT purposes.
For a transfer not to be treated as a supply for VAT purposes, the following conditions must be met:
· There must be a transfer of whole or an independent part of a business;
· The transfer must be made to a taxable person; and
· The recipient intends to continue the business which was transferred.
If any of the above mentioned condition is not fulfilled the transfer of business shall be taxable.
There must be a transfer of whole or an independent part of a business
The transfer must effectively give the recipient the possession of the whole of a business, or part of a business where that part is capable of separate operation. As part of the transfer, all of the goods and services that are necessary for the continued operation of that business or a part of a business must be supplied to the recipient. Depending on the facts, this may include, among other things, goodwill, licences, premises, machinery and equipment, employees, ongoing contracts, and liabilities.
To qualify as a going concern, the transferred business must be operational before and at the time of transfer.
where there is an agreement to transfer a business which is yet to commence, there will be no transfer of a business as a going concern since there is no transferred business which is yet capable of being continued by the transferee.
Similarly, where the business has ceased operation before the transfer date, the transfer will not qualify as a TOGC.
The transfer must be made to a taxable person:
For a TOGC to take place, the recipient must be a taxable person at the time of transfer – i.e. the recipient should be registered or obligated to register for VAT.
· The recipient is registered for VAT;
· The recipient is required to be registered under the mandatory registration rules and has applied for registration to the FTA; or
· The recipient has applied for voluntary VAT registration and the FTA has accepted the application.
The recipient intends to continue the business which was transferred:
The final condition requires that the transfer of the whole or independent part of the business must be for the “purposes of continuing the business which was transferred”.
This requirement will be met as long as the recipient of the business intends to carry on the same kind of business which it acquires.
The entire contents of this article is solely for information purpose and have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation.. It doesn't constitute professional advice or a formal recommendation. The author has undertook utmost care to disseminate the true and correct view and doesn't accept liability for any errors or omissions. You are kindly requested to verify & confirm the updates from the genuine sources before acting on any of the information's provided herein above.