V7.181 HMRC approach to a transfer of a going concern
Imagine the following situation: Mr Jones has traded as a limited company and now sells his jewellery business for £430,000 as a going concern, and charges output tax of £86,000 to the new owner (assuming VAT rate of 20%). He then disappears to Spain, and liquidates the company without ever paying the final output tax liability to HMRC. This is bad news for HMRC because it has no way of recovering the VAT debt because the company no longer has any assets – and the chances are that Mr Jones will be out of sight, out of mind.
In this situation, HMRC will probably use its powers to confirm that the business was the transfer of a going concern, meeting the various rules, and that the supply was therefore outside the scope of VAT. The input tax then claimed by the buyer would be non-reclaimable on the basis that it does not relate to a taxable supply.
In effect, therefore, sound VAT advice on transfer of a going concern issues is probably quite unique in that it is probably more important for the buyer to get it right than the seller. The other relevant point is that even if the buyer is able to recover input tax on any charge, there is a significant cash flow disadvantage if he has to pay 20% of the buying price