Understanding Transfer of a Going Concern: The basics of TOGC

What is TOGC?

Transfer of a going concern (TOGC) is when a business, or part of a business, is sold and meets certain criteria which mean it is deemed to be a TOGC rather than a transfer of assets. In this scenario, no VAT applies to the value of the transaction, and it is ‘outside the scope’ of VAT (no output VAT¹ is charged).

The main purposes of TOGC are:

To relieve the buyer of a business from funding any VAT on the purchase. This helps improve cash flow and having to value assets which may be liable to different VAT rates.
Protecting government revenue by removing a charge to tax and entitlement to input tax where the output tax may not be paid by HMRC.

Conditions for TOGC

The TOGC details are contained within Article 5 VAT (Special Provisions) Order 1995. There are certain conditions, as listed below, which must be met in order for a TOGC to take place, and also specific indicators that assist in supporting a TOGC.

The conditions that must be met for a TOGC to take place include:

The assets must be sold as part of the transfer of a ‘business’ as a ‘going concern’ (note – it does not have to be profitable, but should meet the definition of a going concern for accounting purposes).
The assets are to be used by the buyer with the intention of carrying on the same kind of ‘business’ as the seller (but not necessarily identical – e.g., if an Italian restaurant were to change and become a Chinese restaurant, it still remains within the same sector/ industry, but if that Italian restaurant were to become an estate agents this would not be a TOGC).
Where the seller is a taxable person (VAT registered), the buyer must be a taxable person already or become one as the result of the transfer (it is quite normal for evidence of registration² to be requested). The buyer and sellers VAT positions must match.
In respect of land which would be standard rated if it were supplied, the buyer must notify HMRC that they have opted to tax³ the land by the relevant date, and must notify the seller that their option has not been disapplied by the same date (again, evidence of an option to tax may be requested).
Where only part of the ‘business’ is sold it must be capable of operating separately (a brand, function or geographic location may be separately disposed of).
There must not be a series of immediately consecutive transfers of ‘business’, i.e. there must be a continuation of the business for a ‘reasonable time⁴.’

Indicators for a TOGC

Below is a list of indicators and conditions that would support a business in being a TOGC. This is not a definitive list however the following factors should be considered. The HMRC website provides further detail on each of these requirements, as well as case examples where TOGC was denied due to failing to meet these requirements.

Consensus between vendor and purchaser (agreement that it is to be treated as a TOGC – reflected in the sales documentation).

Both vendor and purchaser must agree that the business sale is treated as a TOGC through promised continuity of the business.

Stock transfer (if the stock is sold separately as an additional item, then VAT would apply).

The transfer of stock is fundamental to the transfer of a business. When a business is sold usually a large quantity of the stock is sold alongside the business. The sale of a small portion of the stock is less likely to indicate a TOGC, unless the effect is to put a purchaser in possession of an identifiable business.

Plant and equipment.

If the equipment needed to carry on the business is transferred, this is an indication that there is a TOGC. However, if it is not transferred the transaction can still be a TOGC, especially if the purchaser already owns similar equipment and so does not need the seller’s equipment.

In the context of selling a business, goodwill is defined as the difference between the value of a business as a whole and the value of its assets as individual items. The following factors can demonstrate the existence of goodwill: relationship between customers and suppliers, the location of the business, the expertise of the workforce and the management, the market share obtained. As well as factors such as the transfer of business names, trademarks, premises, staff etc.

Business name.

The transfer of the business name is the most obvious sign that goodwill has been sold. Previous customers may be drawn to the business largely because it is a name they are familiar with. It will usually mean that the business itself is being transferred and VAT tribunals have attached much weight to this factor.

In some cases it is paramount that the premises that the business is based from is transferred in the sale, however, much depends on the nature of the business concerned and the overall arrangement.

If the new business takes over the contracts of existing staff this will suggest a TOGC. However, even if the staff have been made redundant by the seller, if they have been re-employed by the purchaser, this supports a TOGC. Employment laws such as Transfer of Undertakings- Protection of Employees Act (TUPE) protect staff involved in takeover situations.

Customer lists.

The sale of a list of previous or potential customers is a good indication that a business is being sold. However, a transfer of a customer list alone is not likely to be the transfer of a business – even in the case of a service business whose only real asset of worth it may be.

Transfer of contracts.

If a purchaser takes over contracts with suppliers, this is a good indication that they plan to carry on the business of the seller. Similarly, if they purchase work in progress or take over obligations under contracts with customers, this suggests a TOGC. However, not every case where the benefit of contracts is transferred will amount to the transfer of a business.

Restrictive covenant.

A restrictive covenant in the contract of sale will forbid one or both of the parties, usually the seller, from doing something. This may be that you may not trade in the same business in the same area for a fixed length of time or use the same trading style as before or forbid him from “poaching” customers. The presence of such a covenant in the contract of sale is a good indicator that a TOGC has taken place. There would be no need to protect the purchaser if his new business was not the business previously carried on by the seller.

Contract of Sale.

You should always look at the contract of sale to identify precisely what has been agreed between the two parties as being sold within the transaction. You may find on occasions that no formal contract exists. This is particularly common when the seller and purchaser are closely linked. In these circumstances minutes of board meetings may provide additional information. This is typically categorised into two groups; pre and post-sale. The way the business has been advertised for sale – this extends to the use after the sale, for example, “Under New Management” is a good indicator of continuation of the business. Whilst the business has to continue, there can be a reasonable break in trading to allow for refurbishment, renovation, etc. Again the ‘going concern’ status should not be affected.

(The details of each indicator were as stated by HMRC.)

Understanding whether TOGC applies to your transaction, be that whether you are the vendor or the purchaser, is complex due to the many intricate factors that must be considered in order for the business being sold to qualify. It can be a complex area of tax, and often causes uncertainty. Our Price Bailey experts can assist you on all aspects of TOGC, from deciding whether your business is eligible, seeking guidance on contractual documentation, or understanding HMRC’s decisions. Please use the form below to contact an expert.

Glossary of terms/ supporting definitions:

1. Output VAT

Output VAT is the VAT that your company charges to its customers on sales of goods or provision of services.

2. Evidence of registration

Evidence may be requested to exhibit that both the seller and buyer are in the same VAT position when the TOGC occurs.

3. Opted to tax

This means that if the seller is registered for VAT and has opted to tax, the the buyer must do likewise. The buyer must mirror the sellers VAT/ tax position.

4. Reasonable time

There must be no significant break in the normal trading pattern before or immediately after the transfer. The break in trade needs to be considered in the context of the type of business concerned and might vary between different types of trade or activity. HMRC does not consider that where a ‘seasonal’ business has closed for the ‘off-season’ as normal at the time of sale, that there has necessarily been a break in trade. In addition, a short period of closure that does not significantly disrupt the existing trading pattern, for example, for redecoration, will not prevent the business from being transferred as a TOGC. There should also not be a series of immediately consecutive transfers.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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